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Digitized by the Internet Arciiive 
in 2010 witii funding from 
The Library of Congress 



http://www.archive.org/details/causeofbusinessd01bilg 



THE CAUSE OF 
BUSINESS DEPRESSIONS 

AS DISCLOSED BY AN ANALYSIS OF 
THE BASIC PRINCIPLES OF ECONOMICS 



BY 

HUGO BILGRAM 

IN COLLABORATION WITH 

LOUIS EDWARD LEVY 



WITH TWENTY-SIX DIAGRAMS ^ 




PHILADELPHIA & LONDON 

J. B. LIPPINCOTT COMPANY 

1914 



n'B\-r\ 

.7 



COPYRIGHT, igr.), BY J. B. LIPPINCOTT COMPANY 



PUBLISHED APRIL, I914 



V 



WAV -I 1914 



PRINTED BT J. B. LIPPINCOTT COMPANY 

AT THE WASHINGTON SQUARE PRESS 

PHILADELPHIA, U. S. A. 



?)C!.A3T1661 



PREFACES 



It is a matter of experience that financial crises and periods 
of indiistrial depression continue to recur at successive in- 
tervals. As these events bring distress to many of the in- 
dustrial workers, the question naturally obtrudes itself, is it 
within the range of possibility to correct this evil ? Whether or 
not this can be done depends on the nature of the cause under- 
lying these business disturbances. If these are the natural out- 
growth of industrial progress and commercial development, 
there can be no hope of avoiding them. If, on the other hand, 
they are due to some extraneous cause, then there is a possi- 
bility of preventing their recurrence and of insuring continued 
business prosperity. But even then, an effective remedy can- 
not be pointed out unless that cause is first clearly understood. 

It was through a desire to obtain an insight into this prob- 
lem that I became interested in the study of political economy, 
but a careful reading of various works on the subject left me 
still in the dark. The several explanations of those economic 
adversities advanced in economic literature appeared to me 
altogether unsatisfactory. 

Convinced that there must be some definite cause for the 
recurrent periods of business depression, I continued my in- 
vestigation on basis of those economic propositions which are 
manifestly true, and, proceeding by methods of purely logical 
deduction, I was led to conclusions which in many particulars 
conflict with the currently accepted economic teachings, but 
which furnish a full and complete explanation of those dis- 
turbances and show them to be the symptoms of a curable 
economic disorder. 

My occupation leaving me but scant leisure in which to put 
these conclusions in shape for publication, my earlier writings 
on the subject were but fragmentary and incomplete. Latterly, 
however, through the sympathetic co-operation of another stu- 



vi PREFACES 

dent interested in the same line of investigation, these con- 
clusions have been wrought into the form of the present work, 
which is presented as a contribution to the discussion on this 
most important question. 

Acknowledgment of my obligation is due not only to my 
collaborator, but also to the late Herman V. Hetzel for assist- 
ance in my earlier studies, and to my son, Oscar H. Bilgram, 
for valuable counsel in the preparation of this work. 

Hugo Bilgkam. 

II 

The plan of the present work had been outlined and its 
foundation laid by my collaborator when my interest in its 
subject-matter led to my joining him in bringing it to its 
present form. That interest had long before been aroused 
by the turmoil of contention between labor and capital over 
their respective shares of their joint products, and between 
political parties over systems of money, and by my contem- 
plation of the significant fact that these conditions had 
developed as an accompaniment of the vastly increased pro- 
ductiveness of industry which is so marked a feature of our 
modern time. 

That the existing economic tension, which finds expression 
in combinations of capital to restrain competition in the mar- 
ket of goods and in combinations of wage-earners to restrain 
competition in the market of labor, and in the efforts of both 
classes, each in its own interest, to restrict production, is 
caused by some distortion in the economic system is evident 
enough, and that there is imperative need of some effective 
means of relieving the strain is likewise manifest. 

To learn what remedy there might be for these unnatural 
conditions I had turned, like my collaborator, to the literature 
of economics, and out of the confusing maze of contradictory 
teachings on the subject I had found my way to the con- 
clusion that the rancorous discords which make of our modem 
industrial and commercial life an arena of embittering strife 
are engendered by defects of our monetary system which give 



PREFACES vii 

to capital an undue advantage over labor. Furthermore, that 
no tax reform, no social or political reform can remove the 
cause of the prevailing economic discord, and that nothing 
but a simple readjustment of our monetary system is needed 
to that end. 

The reasons for our conclusions could not be made plain 
without such thoroughgoing analysis of the basic principles 
of political economy as my collaborator had planned, and our 
Joint task has been to present these principles without more 
technical detail than might be necessary for their demonstra- 
tion and to point out their application in such manner as would 
make the subject plain, not only to the specializing student, but 
to every other intelligent reader as well. 

LoTJis Edward Levy. 



CONTENTS 



PART I 
CHAPTEH FUNDAMENTAL CONCEPTS 

I. Introduction 3 

II. Production and Consumption 10 

III. The Social Compact 17 

IV. Value 26 

V. Credit 77 

VI. Money 90 

PART II 

DISTRIBUTION OF WEALTH 

VII. The Process of Apportionment 159 

VIII. Labor and Wages 210 

IX. Land and Rent 221 

X. Capital Goods and Capital Returns 240 

XI. Money and Money Interest 276 

XII. Chance Profits and Losses 289 

PART III 
RESTRAINTS ON INDUSTRY 

XIII. Monopoly 301 

XIV. Monopoly Theory op Interest 311 

XV. Business Stagnation 362 

PART IV 

CONCLUSIONS 

XVI. Currency Reform 383 

XVII. Effects of Currency Refori.: 425 

XVIII. Old Problems in a New Light 456 

Appendix, Comments on the United States Banking and Cur- 
rency Law, Approved December 23, 1913 515 

List of Authors Quoted 519 

Index 523 

Plates op Diagrams 533 



SYNOPSIS 

PART I 
FUNDAMENTAL CONCEPTS 

PAGE 

Chapter I. — Introduction 3 

1. Theory as Applied to Economics. 2. Theory and Practice. 3. 
Induction and Deduction. 

4. Plan of Present Investigation. 

Chapter II. — Production and Consumption 10 

5. Motives of Human Activity. 6. The Process of Developing 

Utilities. 

7. Production. 8. Labor Defined. 9. Labor Embodied in Products. 
10. Means of Production. 11. Specialization of Labor. 12. 
Distribution a Factor in Labor Specialization. 13. Waste 
Attending Production. 

14. Consumption. 

Chapter III. — The Social Compact 17 

15. The Elements of Association. 16. Composite Persons. 

17. Rights, the Bonds of Association. 18. Legal Rights. 19. Right 
and Duty. 20. Definition of Equity. 21. The Right of 
Ownership. 

22. The State and its Function. 

Chapter IV. — Value 26 

23. Significance of the Term. 24. Distinction between Value and 

Utility. 25. Definition of Value. 36. Market Value. 27. 
How Values Are Measured. 

28. The Unit of Value. 29. Price. 30. Labor as a Measure of 
Value. 31. Other Value Units. 32. Expediency of a Com- 
posite Unit. 

33. The Theory of Value. 34. Supply and Demand Defined. 

35. Subjective Valuation. 36. Desire the ImpeUing Force. 37. 
Limitation of Demand. 38. Bohm-Bawerk's Illustration. 
39. Graphical Representation of Utility. 40. The Question 
of Quantity. 41. Reluctance the Restraining Force. 42. 
Graphical Representation of Effort. 43. The Point of Equi- 
hbrium. 44. Choice as Regards Production. 45. Choice 
as Regards Consumption. 46. Advantages of the Graphical 
Method of Study. 

47. Barter. 48. The Buyer's Price Limit. 49. The Seller's Price 
Limit. 50. Exchange Rate in Barter. 51. Buying and 
SelUng. 



SYNOPSIS xi 

52. The Market. 53. The Common Value Denominator. 54. . 
Appraisement of the Value Unit. 55. Interdependence of 
Prices. 56. Price Limits Compounded. 57. Relation of 
Supply and Demand to Price. 58. The Law of Value. 59. 
Current Price. 60. Normal Price. 6L Cost, the Sellers' 
Price Limit. 

62. Cost and Utihty Theories of Value. 63. Both Theories Corol- 
laries of the Same Proposition. 

64. Illustrations. 

65. CapitaUzed Values. 

Chapteb V. — Credit 77 

66. The Nature of Credit. 67. The Right of Ownership Analyzed. 

68. Credit Defined. 69. Three Forms of Credit. 70. Diver- 
gent Conceptions of Credit. 71. "Possession" Versus 
"Ownership." 

72. The Substance of Credit. 73. Superposed Credits. 74. PubHc 
Credit. 

75. The Value of Credit. 76. Depreciated Credit. 
Chapter VI. — Monet 90 

77. Misconceptions Regarding Money. 78. Money not a Value 
Denominator. 79. "Dollar" does not Mean "Money." 80. 
Money not a Store of Value. 81. Money not a Stand- 
ard of Deferred Payment. 82. Importance of Sharp 
Definitions. 

83. The Function of Money. 

84. The Distinctive Feature of Money. 85. Money a Product of 

Social Compact. 86. Monetary Laws. 87. The Right Con- 
veyed by Money. 88. The Term "Money" in its Broadest 
Sense. 

89. The Theory of Money. 90. Money Analogous to Book Ac- 
coimts. 91. Creditors and Debtors of the Money System. 
92. The Issuer of Currency is Debtor. 

93. Standard Money. 94. Holder of Standard Money both 
Creditor and Debtor. 

95. Legal-tender Notes. 96. Depreciated Currency. 97. Fiat 
Money. 98. History of Legal-tender Laws. 99. Legal- 
tender Quahty not Essential to Money. 

100. Subsidiary Coin. 

101. Bank-note durency. 102. The Real Issuers of Bank Cxir- 

rency. 103. Evolution of Modem Banking. 

104. Bank Credit. 105. The Real Issuers of Bank Credit. 

106. Subordinate Systems. 

107. The Value of Money. 108. The Value of Gold. 109. The 

Price of Gold. 110. Bimetallism. 111. Composite Value 
Units. 112. Depreciated Value Unit. 



xii SYNOPSIS 

113. The Seignorage Theory. 114. The Seignorage Theory Un- 
tenable. 

115. The Volume Theory of the Value of Money. 116. Ricardo's 
Statement of the Volume Theory. 117. Mill's Argument. 
118. Mill's Reasoning Analyzed. 119. Newcomb's Argu- 
ment. 120. Newcomb's Reasoning Analyzed. 121. Valid 
Deductions from Newcomb's Equation. 122. The Volume 
Theory in the Light of History. 123. The Volume Theory 
Inconsistent with Facts. 124. Seeming Confirmations of 
the Volume Theory. 125. Minor Incongruities of the 
Volume Theory, 

PART II 

DISTRIBUTION OF WEALTH 

Chapter VII. — The Process of Apportionment 159 

126. Statement of the Problem. 127. Modem Industrial Methods. 

128. The Factors of Production. 129. What is Capital? 130. 
Land a Form of Capital. 131. The Three Forms of Capital. 
132. Classification of Capital Goods. 133. Active and Idle 
Capital. 134. Money is always Idle Capital. 

135. The Conception of Capital as a "Fund." 

136. Classification of Incomes. 137. Wages and Profits. 138. 

Classification of Profits. 139. Gross Profits of Capital. 
140. Gross Business Profits. 

141. Composition of Productive Groups. 142. Active Agents. 
143. Passive Agents. 144. The Venturer. 145. Com- 
posite Agents. 146. The Employer. 

147. Competition, the Controlling Force. 148. Direct Effects of 
Competition. 149. Indirect Effects of Competition. 150. 
The Law of Value Presupposes Free Competition. 

151. Apportionment of Proceeds of Production. 152. The Func- 
tion of Capital Goods in the Apportionment. 153. The 
Value of Capital Goods. 154. Apportiomnent within 
Groups. 155. Economic Relations of Labor and Capital. 

156. Influence of Capital on the Productivity of Labor. 

157. Graphical Analysis. 158. Effect of a Varying Interest 
Rate. 159. Effect of Interest Rate on Wages. 160. Effect 
of a Varying Wage Rate. 161. Graphical Analysis by Dif- 
ferentiated Function. 162. Final Efficiency of Capital. 

Chapter VIII. — Labor and Wages 210 

163. The "Wage Fund" Theory. 164. The Wage Theory of 

Sociahsm. 
165. Three Forms of Wages. 166. Wages Apportioned through 

Competition. 167. Employers' Wages. 168. Merchants' 

Wages. 

169. Adjustment of Wages. 



SYNOPSIS xiii 

Chapter IX. — Land and Rent 221 

170. Land the Prime Source of Wealth. 171. Land Distinguished 
from Improvements Thereon. 

172. Ricardo's Law of Rent. 173. Graphical Representation of 
Ricardo's Law. 174. Misinterpretations of Ricardo's Law. 

175. The Margin of Cultivation. 176. Cumulative Rent. 

177. Intensity of Cultivation. 178. The Point of Diminishing 
Returns. 

179. The Personal Factor in Rent. 

180. The Source of Rent. 

181. Land Values. 182. The Law of Land Value. 183. Specula- 

tive Land Value. 184. Division of the Gross Profits De- 
rived from Land. 

185. Summary. 

Chaptek X. — Capital Goods and Capital Returns 240 

186. Capital Interest. 187. Distinction of Capital Interest and 

Rent. 188. Distinction of Capital Interest and Money 
Interest. 189. Current Theories of Interest. 

190. Calvin's and Turgot's Explanation of Interest. 

191. The Productivity Theory of Interest. 192. Analysis of the 

Productivity Theory. 193. Interest Ascribed to Nature's 
Reproductive Powers. 194. Interest Theory of Henry 
George. 

195. Inception of the "Abstinence" Theory of Interest. 196. 
Senior's Abstinence Theory. 

197. Bohm-Bawerk's Theory of Interest. 198. Utility Theory of 
the Value of Capital Goods. 199. Time Involved in Pro- 
duction with Capital. 200. The Value of Lending. 201. 
Relation of Money to Merchandise. 202. Money never 
"Present" Goods. 203. Money never a Means of Pro- 
duction. 204. Calvin's Reasoning. 205. Interest as an 
Inducement to Production of Capital. 206. Summary. 

207. The "Surplus Value" Theory. 208. The Theory Incon- 
sistent with Facts. 

Chapter XI. — Money and Monet Interest 276 

209. Interest on Money Loans. 210. Money Interest is Paid for 
the Use of Money. 211. The Industrial Function of Money. 

212. Efficiency of Money. 213. Final Efficiency of Money. 214. 
Significance of the Phrase "Efficiency of Money." 

Chapter XII. — Chance Profits and Losses 289 

215. Chance as an Economic Factor. 

216. Profits and Losses from Changes in Value. 217. Profits to 

be Distinguished from Wages. 218. Gambling. 

219. The Element of Risk. 220. Insurance, 



xiv SYNOPSIS 

221. Economic Inertia. 222. Factors of Economic Inertia. 223. 
Economic Momentum. 

224. The Law of Chance Profits. 



PAKT III 

RESTRAINTS ON INDUSTRY 

Chapter XIII. — Monopoly 301 

225. Economic Impediments. 226. Monopoly Implies Restraint. 
227. Ethics of MonopoUes. 

228. Ownership a Form of Monopoly. 229. Patent and Copy 
Rights. 230. Land Ownership. 231. Franchises Depend- 
ing on the Use of Land. 232. Impersonal MonopoUes. 
233. "Cornering" the Market. 

234. Monopoly Incomes. 235. The Power of Monopoly. 

Chapter XIV. — The Monopoly Theory of Interest 311 

236. Usury Laws. 237. Distinction between Usury and Interest. 

238. Money Subject to an Impersonal Monopoly. 239. The 
Supposed Danger of "Inflation." 

240. Interest on Money Due to Competition for Money. 

241. Cause of the Inadequacy of Capital. 242. Key to the Theory 

of Capital Interest. 243. The Missing Link in the Pro- 
ductivity Theory. 

244. The Law of Interest. 245. The Barren Circulation of Money. 
246. The Growth of Loan Debts. 247. Differentiating the 
Financial from the Industrial World. 248. The Several 
Barren Currents. 249. Preparatory Currents. 250. The 
Volume of Active Funds. 251. The Volume of Loan Debts. 
252. The Rate of Interest. 253. A Seeming Contradiction. 
254. Effect of the Interest Power of Money. 255. Inevita- 
ble Consequence. 256. Effect of Business Failures on Pure 
Interest. 

257. Rate of Capital Interest. 258. Capital Interest an Intra- 
marginal Profit. 

259. Currency Laws Examined. 260. Existing Currency Laws 
Inequitable. 261. Pure Interest a Monopoly Tax. 262. 
The Power of the Money Monopoly. 

263. Service Rendered by the Lender of Money. 264. The Third 
Item of Gross Interest. 265. Service Rendered by the 
Capitalist. 266. Abvmdance of Real Capital. 

267. Summary. 

Chapter XV. — Business Stagnation 362 

268. Involuntary Idleness. 269. Excess of Supply over Demand 

270. Insufficient Supply of Money the Cause. 



SYNOPSIS XV 

271. The Cycle of Industrial Activity. 272. First Period. 273. 
Second Period. 274. Third Period. 275. Fourth Period. 
276. Succession of Cause and Effect. 

277. Current Explanations of Business Stagnation. 278. Over- 
trading. 279. Improvident Investments. 280. Undue 
Expansion of Credit. 281. Loss of Confidence. 282. 
Hoarding of Money. 283. Extravagance. 284. Effect of 
Tariff on General Business Conditions. 

PART IV 

CONCLUSIONS 

Chapter XVI. — Currency Reform 383 

285. Essentials of a Sound Currency. 

286. The Security of Money. 287. The Issuer's Pledge. 288. The 

Agent's Pledge. 289. Insurance of Currency. 290. Insur- 
ance of Bank Credit. 291. The Natural Limit of the 
Voliune of Cvurency. 

292. Currency Redemption. 293. The Demand for Gold. 294. 
Can the Monetary Demand for Gold be Reduced? 295. 
Centralized Redemption. 296. Deferred Redemption. 
297. Procuring Gold for Redemption. 

298. The Communal Agreement. 299. The Process of Issuing 
Currency. 

300, Money Tokens. 301. The Cost of Issuing Currency. 

302. Plan of Currency Reform. 303. Organization of Banks of 
Issue. 304. Deposit Insxu-ance. 305. Missing or Lost 
Notes. 306. The Legal-tender QuaUty. 307. The Func- 
tion of Banks of Issue. 308. Summary. 

309. A Credit Clearing System. 310. Ways and Means of the 
System. 311. Payment of Individual Balances. 312. De- 
ferred Payments. 313. Issue of Notes. 314. Advantages 
of the System. 

Chapter XVII. — Effects of Currency Reform 425 

315. Direct Results. 316. Indirect Residts. 

317. Unfounded Apprehensions. 318. Natural Inducements to 
Save. 319. Inducements to Invest Savings. 320. Opposi- 
tion to Currency Reform. 321. The Increasing Cost of 
Living. 322. A Real Source of Danger. 

323. The Land Question. 324. The Right of Land Ownership. 
325. Land Laws Examined. 326. Land Ownership a Vested 
Right. 327. Bearing of Currency Reform on the Land 
Question. 328. A Concrete Illustration. 329. Land Values 
Tantamount to a Public Debt. 330. Assessment of Land 
Values. 331. Exemption of Fixed Improvements from 
Taxation. 332. The Tax Rate. 333. Land Tax Ample for 
Public Needs. 

334. Exclusive Rights or Franchises. 



xvi SYNOPSIS 

Chapter XVIII. — Old Problems in a New Light 456 

335. Diagnosis of the Economic Disorder. 

336. Capital not Productive. 337. The "Almighty" Dollar. 338. 

The Concentration of Wealth. 339. Efforts to Curb the 
Concentration of Wealth. 340. Corporation and Bank- 
ruptcy Laws. 

341. PubUc Debts. 

342. The Strife of Competition. 343. Competition in a Moneyless 

Community. 344. The Advent of Money. 345. The Real 
Battle-ground. 346. Significance of the Illustration. 

347. The Iron Law of Wages. 348. The Employer's Part in the 
Process of Apportionment. 349. The Downward Tendency 
of Wages. 350. Effect of Proposed Currency Reform on 
Wages. 

351. Protective Tariff. 352. Balance of Trade Co-related to Rate 
of Interest. 353. Advantages of a Tariff. 

354. Trade Unions. 355. Labor Legislation. 356. Arbitration of 
Labor Disputes. 357. Strikes and Boycotts. 358. What 
Trade Unions Accomplish. 

359. The Single Tax. 360. Ethical Status of Land Ownership. 
361. Henry George's Theory of Business Fluctuation. 362. 
Analysis of this Theory. 363. Discrepancy between that 
Theory and Facts. 364. Single Tax not a Remedy. 

365. SociaUsm. 366. Theory of Socialism. 367. Impracticability 
of SociaUsm. 368. Communism. 

369. Anarchism. 370. Land Tenure under Anarchism. 371. 
Theory of Anarchism Regarding Price. 

372. Conclusion. 

APPENDIX 

Comments on the United States Banking and Currency 
Law, Approved December 23, 1913 515 



REFERENCES AND CROSS REFERENCES 

The index at the end of this volume is supplemented by references and 
cross references inserted in the text. The numbers enclosed in parentheses 
refer to the serial numbers of the paragraphs. 

For illustration, in paragraph 1 will be found the reference (43, 329). Both 
these numbers have their counterparts in the paragraphs 43 and 329, 
indicated by the number (1). The statements so marked are co-related. 
Where there are several cross references in the same two paragraphs, they 
are distinguished by letters. Thus in paragraph 56 there are two refer- 
ences to paragraph 39 which are marked in paragraph 39 by (56a) and 
(56&), and in paragraph 56 by (39o) and (396). 

When a reference relates to a subject treated in several consecutive 
paragraphs, the counter reference in the text referred to is omitted. 
See, for instance, the mark (36-38) in paragraph 48, which has no 
counterpart in either of the paragraphs 36, 37 or 38. 



PART I 

FUNDAMENTAL CONCEPTS 



THE CAUSE OF 
BUSINESS DEPRESSIONS 

CHAPTER I 

INTRODUCTION 

1. Theory as Applied to Economics. — Almost from the 
beginning of the modem system of production industrial prog- 
ress has been attended by economic disturbances which have 
gradually widened their compass from comparatively localized 
extent to national and even international proportions. While 
the need of preventing such disturbances is universally recog- 
nized, none of the remedies thus far applied has proved 
efficacious. 

Before such remedy can be prescribed, it is necessary that 
the cause of the evil be clearly understood. Why is it that in 
these modern days, when signal advances in science and the 
arts have led to improvements in the means and methods of 
production in every direction, there are times when multitudes 
of workers find themselves brought to want and privation for 
lack of the very things, the production of which has been so 
greatly facilitated? Why is it that "good times," when em- 
ployment can be had by all who seek it, are periodically suc- 
ceeded by "hard times," when thousands are thrown out of 
employment in practically every branch of industry and com- 
merce? Why, in short, are the processes of production and 
exchange subject to interruptions which are attended by so 
much misery? 

For answer to these questions we must look to the science 
of economics. But it is frequently said that in this field the 
rigid treatment which is used in the exact sciences is not 
applicable, because no given economic condition affects all men 
alike. This uncertainty, however, cannot account for the prev- 
alence of the many opposing views on economic subjects, nor 

3 



4 FUNDAMENTAL CONCEPTS [1 

for the great divergence of conclusions derived from pre- 
sumably identical premises. Disagreement among men of 
affairs on questions like Protection and Free Trade might well 
arise from a divergence of business interests, but similar dis- 
cord among students can be accounted for only by errors of 
reasoning. 

Differences in the disposition of men who compose the body 
social unquestionably introduce a difficulty in the study of 
economics, but this difficulty cannot be greater than that met 
with in the theory of chance. An illustration will make this 
clear. 

A marksman firing a large number of shots at a target will 
find the bullet holes spread over it, clustered thickly near the 
centre and more widely scattered toward the circumference 
(43, 329).^ If the shots are fired under normal conditions, 
measurements will show that the geometric centre of aU the 
marks practically coincides with the bull's-eye. If, on the 
other hand, abnormal conditions prevail, unknown to the 
marksman, such as a steady cross wind, the geometric centre 
of the shots will be displaced precisely as much as a single shot 
would be deflected, had it been aimed true. 

Although the presence of constant disturbing factors is not 
revealed by a single shot, owing to uncertainty in the aim, 
nevertheless a large number of shots will plainly disclose the 
existence of extraneous influences. While it is impossible to 
predict where a single shot will hit, even though all conditions 
are known, the average location of a large number of shots can 
be definitely calculated from the velocity of the wind or the 
intensity of any other known disturbing influence. 

So in economic questions it is hopeless to forecast in in- 
dividual cases what would result from given conditions. The 
personal differences in men introduces uncertainty, just as 
the unsteadiness of the hand of the marksman disperses the 
shots. But this fact does not preclude the possibility of formu- 
lating the rules that govern the general trend or average effect 
of any given cause, however variable its effect may be in in- 

^ See note concerning references on page preceding Chapter I. 



2] INTRODUCTION 5 

dividual cases. To determine these rules it is necessary that 
only the essential factors be taken into consideration, while the 
merely incidental influences are left out of account, or, as in 
our illustration, that we distinguish between the steady wind 
which affects all the bullets alike, and the quivering of the hand 
which accounts for the scattering (215). By considering only 
the constant forces and leaving out of account the momentary 
factors, conclusions can be reached which, while not applicable 
to every individual case, are yet true as regards the conditions 
generally. To find general laws, then, is all we can expect to 
accomplish, and if this is kept in view, there can be no room 
for disagreement in the deductions obtained from accepted 
premises. 

2. Theory and Practice. — In his endeavor to obtain from 
surrounding nature with the least exertion all that can make 
life enjoyable, man has learned to make the powers of nature 
subservient to his desires. This has been achieved principally 
through the advances made in science and the arts. By study- 
ing facts, the relation that exists between cause and effect has 
been found and formulated into "laws," and these make it 
possible to foresee what must result if certain known causes 
are at work, and also to show the way to utilize the forces of 
nature when certain results are desired. Theory based on 
ascertained facts has been an important factor in the process 
through which we have obtained mastery over the powers of 
nature, and since true theory is founded on an accurate under- 
standing of facts, such theory must be borne out in practice. 

It is, however, quite natural that mistakes are occasionally 
made. When theories are founded on a misinterpretation of 
facts, or when sound theories are incorrectly applied, the 
reasoning must lead to faulty conclusions. It thus happens 
only too often that what is supposed to be true in theory is not 
confirmed by the facts. 

This has thrown more or less doubt on the utility of 
theoretical deduction, particularly where, in addition, a known 
cause is found not to produce the same effect in different 
cases. Failure in the application of theory should, however, 
inspire caution rather than distrust in the efiicaey of deductive 



6 FUNDAMENTAL CONCEPTS [s 

reasoning. The fact that this method has often been misapplied 
is no reason why it should be rejected in the investigation of 
phenomena which the inductive method has failed to explain. 

There are cases where a certain effect is due to a combina- 
tion of several different causes. Such cases can be effectively 
investigated only by considering each of the different causes 
separately. It is then often found that some one of the causes 
at work is the predominant factor, and, in order to analyze 
the conditions, the minor and merely modifying causes are 
primarily left out of consideration. Conclusions so derived 
are known as "theoretical" results, and these cannot, of 
course, be expected to agree more than approximately with 
the actual facts. If subsequently in any given case the omitted 
factors are also taken into account, the theoretical result is 
thereby corrected and is then generally found to be in prac- 
tical agreement with the facts. Thus the engineer computes 
the power of a steam engine he is designing by first considering 
the propelling power of the steam, and from this he deduces 
the theoretical horse-power. But since this amount is reduced 
by friction, the loss so incurred must be subtracted from the 
first result to obtain the effective power. 

Discrepancies between theory and practice which are due to 
incomplete analysis do not prove that the theory is wrong. 
There are in fact many problems that can be solved only by 
dealing primarily with the dominant factors of the case and 
considering the minor factors only so far as they modify the 
effect of the dominant cause. Most notable of this class of 
problems are those of economics, and we shall therefore pursue 
this course in treating the subject before us. 

3. Induction and Deduction. — As already noted, the 
method of deductive reasoning in the study of economics has 
been held to be unreliable for the reason that all men do not 
react alike to the same i pulses. It is therefore assumed that 
this study must begin with observation of facts and classifica- 
tion of statistics, from which to determine the cause or causes 
that produce the observed results. In other words, it is held 
that only inductive reasoning from observed facts can lead to 
reliable conclusions. 



s] INTRODUCTION 7 

However valid the conclusions of inductive reasoning may- 
be in some instances, the fact remains that if the methods of 
deductive reasoning were to be excluded from the study of 
economics, this science would be of no practical use. Induction 
is a process of reasoning from effect to cause, necessary for 
discovering laws of nature, while deduction is a process of 
reasoning from cause to effect, applied in utilizing the knowl- 
edge already acquired, either for the purpose of learning what 
result must foUow from given conditions, or what conditions 
are requisite for the attainment of a desired result. The two 
methods are complementary. In fact, when through the process 
of inductive reasoning a law of nature has been discovered, it 
should stand the test of deductive application to all eases 
within its province. When Isaac Newton, by observing cer- 
tain facts, discovered what appeared to him a general law of 
gravitation and put it to a test by trying to explain the 
orbital motion of the moon, he found a discrepancy that made 
him hesitate in accepting his inference. Many years later, 
when a new measurement of the earth's diameter disclosed de- 
cided inaccuracies in former measurements, he repeated his 
computation on the new basis and found that the discrepancy 
disappeared. Then only did he feel justified in proclaiming 
his discovery to the world. He did not accept the law which 
the inductive method suggested to his mind before he had 
verified it by deductive application in a crucial test. 

If all theories were similarly tested before their acceptation, 
the widespread distrust of theory, especially in economics, 
would never have gained ground. But it appears that in 
many instances students of economics, legislators, and par- 
ticularly would-be social reformers fail to take this precaution. 
Imbued with the notion that economic laws can be discovered 
only through studying statistics, they rely too much on these 
and base their plans of reform on theories which have no 
other foundation than the mere coincidence of certain facts. 
That opposite theories are often based on the same set of 
statistics, by merely picking out different sets of coincidences, 
shows how easy it is to be misled by methods of induction and 
how discrepancies in economic theory are apt to originate. 



8 FUNDAMENTAL CONCEPTS [4 

Furthermore, in the effort to prove a point, recourse is 
often had to voluminous quotation from various authorities. 
This is apt to degenerate into dogmatism, which is out of place 
in the scientific treatment of any subject. Parallel quotations 
are quite in order as serving to show that certain propositions 
have been propounded before, but not if they are offered as 
proof of the validity of any proposition. Every demonstra- 
tion should be conclusive in itself and should not require an 
appeal to extraneous authority for confirmation. A scientific 
truth cannot he estahlished l>y a majority vote. 

4. Plan o£ Present Investigation. — As already stated, the 
primary object of the present investigation is to learn the 
cause of financial crises and the attendant business depressions, 
and its aim is to find a remedy. The subject being clearly 
within the province of economies, the most promising course 
is to begin with first principles and consistently to pursue the 
search, wherever it leads, no matter whether the conclusions 
agree or conflict with accepted views. Before entering upon 
the inquiry we should clearly understand the scope of 
economics, and the following is a comprehensive statement of 
the case. 

The siibject of economics comprises those social relations 
which arise in the course of the co-operative efforts of men to 
satisfy their needs and gratify their desires. A clear under- 
standing of these relations is necessary in order properly to 
determine what laws and conventions will promote the general 
well-being. 

The first part of the present treatise is devoted to laying an 
adequate foundation for the subsequent investigation. To this 
end the chief elemental factors, as "right," "ownership," 
"value," "credit," "money," are sharply defined and the 
conceptions analyzed. 

The second part comprises a study of the processes by 
which the value of the products of industry is apportioned 
among the agents of production. The inquiry is directed 
particularly toward finding what determines the sharing of 
the products or their value between the workers, on the one 



41 INTRODUCTION 9 

hand, and the owners of the material with which they work, 
including land, on the other. 

In the third part follows a study of the principal socio- 
political factors which obstruct economic development. This 
examination leads to a recognition of the fundamental cause 
of business depressions. 

The fourth part comprises several chapters, in the first of 
which the conclusions reached in the preceding chapters are 
utilized in pointing to ways and means for removing the cause 
of business depressions. The second is devoted to a considera- 
tion of the natural consequences of such a course. The closing 
chapter contains a review of current economic doctrines in the 
light of the conclusions derived in our examination. 

In the treatment of the subject, which, as already stated, 
proceeds on lines of deductive reasoning, mathematical 
methods are utilized wherever found advantageous, but noth- 
ing more complex than elementary algebraic formulas and 
simple analytical diagrams is employed. An earnest effort is 
made to avoid abstruseness, so that the reader will be able to 
follow the argument with ease and to pass judgment for him- 
self upon the validity of the conclusions. 



CHAPTEE II 

PRODUCTION AND CONSUMPTION 

5. Motives of Human Activity. — Before entering upon the 
examination of the relations between men arising in the course 
of their co-operative efforts, a brief survey of the motives of 
human activity will prepare us better to understand the later 
investigation. We shall first touch upon the reasons why men 
exert themselves, and especially why they prefer to work in 
co-operation. These reasons are independent of the form of 
social organization; they exist whether individual freedom 
prevails or whether men are bound together in some socialistic 
or communistic association. We are now dealing with the 
relations that exist between man and nature, and not with 
those which arise between man and man. 

The impulse to exertion springs from human needs and 
desires. The means through which these needs and desires 
can be satisfied are furnished by nature, but these are always 
in such a form that their utility is not available without 
human effort. Even wild growing fruit must be gathered. In 
most cases the labor required is more or less complex, a number 
of successive operations being necessary to prepare the 
products of nature for man's requirements. 

6. The Process of Developing Utilities. — Utility, namely, 
the capability of things to satisfy needs or gratify desires (24), 
is present in the materials furnished by nature in a latent or 
immature state, and the procedure which makes it available 
can aptly be likened to a maturing process. Similarly, 
products in their more or less advanced stages, as well as in 
their natural condition, may be termed immatured products. 
Maturity, in this sense, is not attained until the thing is ready 
for final usd. Sugar, for instance, is generated by a vital 
process in plants, particularly in sugar-cane, but to obtain 
sugar for man's purposes the cane must be cultivated and 
harvested, the juice expressed and evaporated, and the crystals 

10 



7] PRODUCTION AND CONSUMPTION 11 

so obtained transported to refineries where, by a series of 
chemical and physical processes, the impurities are removed. 
But even then the sugar is not an economically mature 
product. The grocer, in bringing it to his store, performs one 
of the necessary acts, and a further advance is made when the 
purchaser takes it home. Viewed economically, a pound of 
sugar in the pantry is more nearly mature than an equal 
quantity at a grocer's or at a refiner 's. And even in the pantry 
it is not fully matured, for the labor of the cook is required to 
make it a constituent of the food in which it will be finally 
applied to its ultimate use. 

7. Production. — The process termed "production," by 
which utilities are developed or matured, not only embraces 
the vital, the physical, and the chemical changes of the wealth- 
forming material, but also those transfers from place to place 
and from hand to hand, through which the things are forwarded 
toward consumption. 

Every product of nature has a range of utilities peculiar 
to itself. Only such utilities as are included in this range can 
be developed by labor. Utilities cannot be created; they can 
only be developed where they exist in potential form. Iron 
can be obtained only from ores containing iron. Sand cannot 
be twisted into a rope, no matter how much labor may be 
applied. And in materials possessing capabilities of the same 
kind, differences exist by reason of which different amounts 
of effort are required to make them useful. It takes more 
labor to obtain copper from ores in the form of oxides than 
from those containing copper in a native state. The growing 
of agricultural produce takes more labor on sterile than on 
fertile soil. Such specific differences can be taken into account 
by considering all these products as being furnished by nature 
in different stages of maturity, some requiring more, others 
less labor to develop their utility (180). It thus happens that 
many products of nature in their native state are as nearly 
mature as other products to which more or less labor has 
already been applied. 



12 FUNDAMENTAL CONCEPTS [8, 9 

8. Labor Defined. — In economic discussion the word *' la- 
bor" should be understood as denoting all human efforts 
directed to a useful end. These efforts may be of a manual or 
of a mental nature. All efforts are labor, in so far as their aim 
is the development or preservation of utilities, or as they are 
directed towards satisfying some need or desire. In the mean- 
ing of this term are to be included not only the efforts of tillers 
of the soil, miners, artisans, carriers, but also those of directors 
of industrial enterprises, merchants and clerks, teachers and 
preachers, musicians and actors, doctors and lawyers ; in short, 
all services that are in demand. In modem progress ever- 
increasing importance attaches to mental labor, for manual 
labor is made vastly more effective through the directing effort 
of mind. 

9. Labor Embodied in Products. — As a rule there is a 
greater or less interval of time between a productive effort and 
the gratification to be obtained through it. This becomes pos- 
sible through the capability of matter to retain, at least for a 
time, the impress of labor applied to it. It may be said that 
matter absorbs and preserves the labor through which utilities 
are advanced toward maturity. Such matter, then, becomes 
the embodiment of labor and the medium through which the 
services rendered by labor can be conserved and transferred at 
pleasure from place to place and from one person to another. 

The capacity to absorb and retain the effect of labor is not 
confined to inanimate things alone, but is also present in the 
physical and mental attributes of man. The mother teaches 
the child the rudiments of knowledge, the teacher imparts 
general and specialized instruction, the discoverer widens the 
horizon of our understanding, and the inventor broadens the 
scope of our capacities. It is by education and training that 
man is prepared to perform his work, and by practice that his 
skill is developed. 

The term "unproductive labor" is frequently applied to 
efforts such as dramatic performances, the rendering of music, 
delivery of lectures, and so forth. But the onlj^ essential dif- 
ference between these and other productive efforts consists in 
the difference of time which elapses between the moment of 



10] PRODUCTION AND CONSUMPTION 18 

production and that of consumption. Although in such cases 
production and consumption are unavoidably simultaneous, 
the performance of such labor includes all the features of the 
process of production. All products of labor being more or 
less perishable, the distinction between so-called productive 
and unproductive labor is in the last analysis only a matter 
of time, and the term ' ' unproductive ' ' is therefore a misnomer. 

ID. Means of Production. — The modern processes of pro- 
duction are generally complex and are characterized by the 
proportionately large amount of labor devoted to the making 
of things that are not destined to become integral parts of 
the final product, and which, in fact, serve only as means of 
completing that final product. Whether these means of pro- 
duction be tools, machines, factories, railroads, stores, and so 
forth, they are in themselves incapable of satisfying ultimate 
needs or desires. Nevertheless they are produced for that 
purpose and with that end in view. The making of a trowel 
is as truly a step toward the building of brick houses as is 
the making of the bricks; but though the trowel itself is a 
finished implement, its utility is only potential or immature, 
for its purpose is the house, which is the thing possessing the 
ultimate utility. The object of making a loom is to produce 
garments, and the maker of the loom assists in the manufacture 
of all the cloth that will ever be woven on this machine. In 
the economic sense, the labor spent in building the loom is 
absorbed by the cloth as the loom gradually wears out (14, 
132,153,197). 

In the endeavor to increase the efficiency of labor the 
means and methods of production have been improved and 
multiplied. As a result they have become more and more 
complex, and an endless variety of ways of accomplishing the 
same end have come into use (156a). As a rule, every in- 
crease in the efficiency of labor is coincident with greater com- 
plexity in the method. It does not follow, however, that every 
expansion in the means and methods of production yields in- 
creased advantages. Just here the intelligence and fore- 
thought of man becomes an all-important factor, for even in 
the effort for betterment excess is not impossible. Improve- 



14 FUNDAMENTAL CONCEPTS [ii. 12 

ment of appliances, for instance, can be of advantage only if 
the extra cost of making and maintaining the improvement 
does not exceed the saving that can be effected thereby. Other- 
wise the use of such improvement becomes a source of loss 
(1566). 

11. Specialization of Labor. — In the application of means 
of production both specialization of industry and co-operation 
are almost alvs^ays involved. Long before the invention of 
labor-saving machines it was recognized that great advantages 
could be gained by each worker acquiring skill in some one 
trade and restricting his activity to that specialty. With the 
introduction of modem appliances the specialization of work, 
or, as it is more generally called, the division of labor, has 
been carried into the minutest details of every industry, and 
this has necessarily been attended by co-operation, so that now 
in many branches thousands of workmen are employed under 
one direction. In this way the application of machinery, the 
specialization of labor, and the aggregation of workers com- 
bined bring about the vast increase of productivity which 
characterizes the present age. 

12. Distribution a Factor in Labor Specialization. — There 
is, however, one factor that in some measure reduces the gain 
derived from the division of labor. All systems of specialized 
production necessitate the additional labor of distribution, and 
this is particularly marked in the modern industrial world. 
The work of the transporter and of the distributer is indis- 
pensable. But the gain from the division of labor far exceeds 
the cost of this work. 

The work of transportation has brought into existence 
some gigantic organizations, particularly since the advent of 
the locomotive and the steamship ; and the work of distribution 
requires the labor of countless merchants and tradesmen in 
collecting the great staple articles in wholesale centres and 
effecting their distribution to the consumers through retail 
channels. 

A part of the merchant's business is to bring his goods to 
the notice of the public, which he may do in various ways, 
generally by exposing them to view or by advertisement. The 



13, 14] PRODUCTION AND CONSUMPTION 15 

prospective purchasers are thereby informed where certain 
goods can be obtained. The labor devoted to disseminating 
this information is manifestly part of the labor of distribution. 
Simply placing an article in a store where such things are 
known to be sold imparts to it a share of this labor, and its 
utility is thus advanced a step nearer to maturity (217). 

13. Waste Attending Production. — There is one more 
factor that is worth considering at this point. The output of 
products is often diminished by unavoidable waste as well as 
by accident. In many branches of industry loss is unavoid- 
able through some part of the products becoming useless in 
the process of manufacture and distribution (58), and all 
efforts toward preventing or reducing loss of any kind are on 
a par with productive labor. In spite of the utmost effort 
waste will occur, and the best that can be done is to minimize 
it. But this cannot economically be carried beyond the point 
where the saving will compensate for the labor involved (219). 

14. Consumption. — In the process of production material 
is prepared for the purpose of meeting human needs. In the 
process of consumption the products so prepared fulfil this 
purpose. In common parlance the latter term is generally 
used only in connection with food and drink, but we must 
here understand it in a broader sense. Thus not only food, 
but also clothing, furniture, houses, in short, all products of 
labor, undergo consumption when they are used to satisfy 
human wants. 

As a rule, every step in the process of consumption brings 
about a partial or complete destruction of that utility which 
was developed in the process of production. Food, viewed as 
an economic product, is totally destroyed when it is eaten 
Clothes, when worn, deteriorate by degrees until they are 
finally worn out. Even goods of a more durable nature, such 
as furniture and houses, cannot stand the wear and tear of 
use forever. Such examples show that the amount of utility 
stored up in products is limited and decreases with every act 
of utilization. 

Putting products to use is, however, not the only cause 



16 FUNDAMENTAL CONCEPTS li4 

of their deterioration. Not only are the elements of nature 
constantly at work to impair the utility of things by gradual 
decay, but the danger of accident threatens their existence. 
An uninhabited building will in time fall into ruia as surely 
as one that is occupied, unless kept in repair. An abrupt 
ending may come to things through various forms of accident, 
through fire or water, through storm or earthquake. Although 
most of man's works escape accidental destruction, there are 
few things which do not succumb to the slow but certain 
ravages of time. 

It is generally within man's power to ward off the inroads 
of nature by protective means, and also to mend the effects of 
wear and tear. The process of repairing or of renovating 
things is nothing more than restoring the utilities which have 
been partly lost through use or decay. 

From the economic viewpoint the means of production, 
such as tools and machines, possess utility only in a potential 
or immature form. While being used up in the course of 
their utilization, they do not satisfy any ultimate desire. 
Their wearing out has a significance radically different from 
the using up of matured products in satisfying human needs. 
In both cases, to be sure, things are destroyed, but in the one 
ease the potential utility of the implements is transferred in a 
more advanced form to the products that are being made (10), 
while in the other ease mature utilities disappear. The wear- 
ing out of tools is part of the process of production ; the using 
up of mature products constitutes the process of consumption. 
Means of production may deteriorate by use or meet with 
accidental destruction, but they cannot be "consumed." 

We have thus far considered only the relations between 
man and nature and will next take up the relations between 
man and man, the real subject-matter of political economy. 



CHAPTER III 

THE SOCIAL COMPACT 

15. The Elements of Association. — In order to obtain a 
clear conception of the economic relations existing in society, 
we must, first of aU, make ourselves acquainted with the 
elements among which economic relations exist. 

The individual person is manifestly the primary element, 
the atom, of the economic organism, and in primitive com- 
munities this is perhaps the only economic entity that need 
be considered. But in modem society, with its complex 
systems of production and specialization of work involving 
co-operative effort, we shall have to deal with groups as 
entities in which the individual is absorbed and his identity 
practically lost. As atoms combine and form molecules which 
possess properties peculiar to themselves, so may individuals 
group themselves into composite bodies which are to be treated 
as economic persons. 

16. Composite Persons. — Such groupings occur in the 
business world in the form of partnerships composed of sev- 
eral individuals, of stock companies composed of larger 
numbers, and of consolidations of such companies in various 
forms of organization. These combinations assume the char- 
acter of distinct persons or entities, entering into business 
relations with individuals or with other composite persons 
(67). An individual member of a partnership may even do 
business with the latter, or an individual stockholder with the 
company in which he holds stock. Since our investigation 
refers to general economic rather than to specific business 
relations, we must go farther and recognize yet other entities 
consisting of aggregates of individuals. For instance, all 
men identified with a business organization, such as employer, 
foremen, bookkeepers and workmen, as well as capitalist and 
landowner, or stock and bondholders, compose a productive 
group. Furthermore, when comparing the interests of em- 

2 17 



18 FUNDAMENTAL CONCEPTS [17 

ployers with those of the employed, or when examining the 
economic status of landowners, of capitalists, or of money- 
lenders, it is necessary to treat such classes as economic 
entities. 

Whenever the external relations of such entities are under 
discussion, the relations existing between the individuals com- 
posing them must be left out of account. And when dealing 
with internal relations, namely, those among the individual 
members of a group, these must be examined independently 
of external relations. 

In view of the fact that a single person may be a member 
of a number of these groups, we have to consider not only 
economic persons in the form of these groups, but also such as 
take form through the exercise of separate economic functions 
by the same individual. Just as a man may divide his activity 
by being manager of a business, director of a bank, and 
treasurer of an association, so a workman may be landlord, if 
he owns a house which he rents out; capitalist, if he owns 
shares of railroad stock ; money-lender, if he has a deposit In 
a savings bank. A man 's interest in one capacity may indeed 
be opposed to his interest in another. It is just because one 
man may at once be employer, workman, capitalist, money- 
lender, landowner, and what not, that in the investigation of 
these economic functions and of the relations between any two 
of them we are to consider each of these functions as repre- 
sented by a separate economic being, irrespective of the real 
persons by whom the functions are exercised. We must 
personify the functions and treat them as though they were 
individuals (56, 247). 

17. Rights, the Bonds of Association. — Economic relations 
in society exist usually in the form of ' ' rights ' ' and ' ' duties. ' ' 

Ordinarily the word "right" is used in so many senses 
that it is necessary sharply to define the meaning in which it 
is to be used in economics. We hear of moral, of legal, of 
natural, of inalienable rights, and so forth, each having a 
different meaning. For illustration, a Jewish merchant con- 
siders that he has a moral right to keep his store open on 



17] THE SOCIAL COMPACT 19 

Sunday, but he has no legal right to do so where Sunday laws 
forbid. When we examine the significance of the word "right" 
thus variously qualified, we recognize "moral right" as apply- 
ing to conduct which does not violate what is regarded as good 
morals, "legal rights" as applying to all that which is in con^ 
formity with both common and statutory law, "natural right" 
as referring to whatever is not contrary to natural law, etc. 
The idea underlying them all in common is freedom to act 
within the bounds imposed respectively by dictates of morals, 
of laws, of nature. The essence of right, then, is absence of 
restraint, and rights can be conceived only by contrast with 
those restrictions which limit freedom. Thus, travel on private 
land being forbidden, the use of the highway becomes a right 
by contrast. To lay conduits under the streets of a city is 
forbidden to all except those to whom a special right is given 
by franchise. 

Ethical considerations were no doubt the original motive 
for regulating individual conduct, and only because men's 
judgment differed as to what was right or wrong was it neces- 
sary to arrive at conventional agreements and formulate these 
into law.^ 

It is true, a sense of right and wrong existed even in 
primitive society before laws were written or courts estab- 
lished. Rights then existed by dint of common or unwritten 
law, and when laws came to be formulated and enacted they 
were little else than unwritten law put in stated form. In 
this way legal rights were born of moral rights. The Ten 
Commandments are among the oldest of our laws, and these 
have been supplemented by both ecclesiastic and secular enact- 
ments, so that now our system of law is exceedingly com- 
plicated. 

^ In the use of the term " law " we must guard against possible 
confusion, as it has two strictly distinct meanings. In the one sense it 
means rules regarding the relations between man and man, adopted and 
enforced by the body politic; in the other it means rules of nature 
regarding the relation between cause and effect. Thug, " currency laws " 
have been enacted by the law-making power of government, while the 
" law of rent " has merely been promulgated by its discoverer. 



20 FUNDAMENTAL CONCEPTS [is 

There have been many instances of the enactment of laws 
which at a later period were recognized as unjust. Yet the 
rights created by these laws were accepted as such and enforced 
by governmental power. Up to a comparatively recent time the 
right to own a slave was as real as the right to own a horse or a 
hat, and laws were enforced to that effect. The injustice of 
such laws is now universally acknowledged. In like manner, 
laws which to-day are considered right and proper may to- 
morrow be condemned as improper, 

1 8. Legal Rights. — Since the purpose of the study of 
economics is to determine what public policy is most conducive 
to the general welfare of the community, it is only legal rights 
that concern us here, and among these we can distinguish two 
categories. 

The one class comprises such rights as exist by implication 
instead of by specification, and which therefore require no 
statutory definition. Every person has legal right to do that 
which is not contrary to law. As regards such rights, laws do 
not say what may be done ; they only specify that which may 
not be done. 

The other class comprises such rights as are brought into 
existence through special exemption, granted to one or more 
persons, from restraint imposed upon others, that is to say, 
through grant of special privilege to do what is forbidden gen- 
erally. Laws creating such rights specify what may be done, 
in other words, the extent of the exemption from general 
restraint. 

The difference may be noted by contrasting the general 
right to drive a team on a public highway with an exclusive 
right to construct and operate a car line on the same road. 
The first is a right existing because of the absence of legal in- 
terdiction, while the second is a right because legal inter- 
diction is placed on all but those excepted therefrom (226). 
In the latter class are really embraced other rights than those 
which are commonly known as franchises or privileges, for 
the right of ownership, patent and copyrights, the right of 
creditors and so forth, bear the same characteristics. Such 
rights are creations of law in the sense that law and the power 
behind it are requisite to impose restraint of freedom on all but 



19, 20] THE SOCIAL COMPACT 21 

the holder or holders of the right, whose freedom is then ex- 
ceptional or exclusive. Laws of this kind are virtually public 
expressions of mutual agreements by which all members of the 
community are bound to acquiesce in the rights granted by 
the community to certain of its members and, in case of need, 
to help in preventing the infringement of such rights. By for- 
bidding and punishing theft and other acts of unjust ap- 
propriation, the right of ownership is established. Patent and 
copy rights exist by virtue of legal protection against un- 
authorized imitations of inventions, or reproductions of works 
of art or literature. 

It is only rights of the second category which are de- 
pendent on legislation, and therefore they are the only ones 
which properly lie within the scope of economics. 

19. Right and Duty. — As just intimated, such rights can 
exist only by virtue of a double obligation assumed by the 
community. In the first place, the people agree to give up a 
certain measure of liberty and to submit to the restraint in- 
volved. In the second place, they agree to give the needed 
protection against infringements of the right when occasion 
arises. Thus, the lawful right of any individual can subsist 
only through the obligation or duty of protecting that right 
assumed by the community. 

The performance of that duty is usually delegated to those 
composing the judicial and executive departments of the 
state, and the obligation of the people in this connection is 
reduced practically to the payment of those taxes from which 
the cost of maintaining the protective machinery is derived. 
Those who pay these taxes are really the ones who afford the 
protection, the court and police officers being merely their 
employes. 

20. Definition of Equity. — In the sense in which we here 
use the term ** right," it is the correlative of "duty," and the 
relation of right and duty is akin to that of receiving and giv- 
ing. Both terms denote the same condition presented from 
opposite points of view. A recognition of this relation will 
enable us to obtain a clear understanding of what ** equity" 
really means. 



22 FUNDAMENTAL CONCEPTS [21 

Let us begin with an illustration. The victim of theft can 
call upon the police and set the whole department in motion to 
discover the thief, and under like emergency everybody else 
has the same right. But there can be equity only if all those 
who have this right share uniformly in the duty of maintain- 
ing the protective machinery. Or, take the ease of a patent 
right, where the public agrees to abstain from the unauthorized 
use of the invention for a certain number of years. The right 
thus bestowed on the inventor becomes equitable from the fact 
that he renders an equivalent by fully describing the invention, 
so that after the expiration of the period of protection anyone 
versed in the art will be able to utilize it. 

Putting it briefly, a compact by which a right is bestowed 
and a duty imposed is equitable only if those who enjoy the 
right are burdened with the corresponding or with some 
equivalent duty, and conversely, if those upon whom the duty 
devolves are also invested with the corresponding or with some 
equivalent right. In other words, equity demands that the 
distribution of the benefits and burdens of right and duty shall 
be reciprocal, and laws in which this reciprocity is absent or 
distorted are inequitable (259, 260, 325). Accordingly, if the 
right of ownership is to be equitable, the ta:s:es from which the 
cost of protecting property rights is defrayed must be imposed 
upon owners without discrimination (228). As an instance of 
inequitable rights may be mentioned the right to own slaves, 
now happily abolished. It was the slave 's duty to work for the 
master to the fullest of his ability, while the master 's duty was 
only to feed, clothe and house the slave according to his own 
discretion. In general, the service rendered by the slave ex- 
ceeded the service rendered him in return. In this institution 
reciprocity of right and duty was clearly incomplete. 

21. The Right of Ownership. — By far the most important 
of all economic rights, and the only one we shall examine in 
detail at this stage, is the right of ownership, the cornerstone of 
civilization, upon which practically all other economic rights 
rest. 

A clear conception of the nature of "ownership" can be 
obtained by contrasting it with "possession." The latter ex- 



21] THE SOCIAL COMPACT 23 

presses a merely physical relation of a thing to a person, while 
the former is descriptive of an economic relation. Although 
the owner of a thing is generally its possessor, this is not a 
necessary condition, inasmuch as he may for a time place it in 
possession of another without relinquishing his ownership (68) . 
In that case he reserves the right of regaining possession at a 
future time, usually with some compensation for its use. In a 
certain sense, the owner retains command of the thing. We 
may accordingly define * * ownership ' ' as that economic relation 
of a thing to its owner which exists by virtue of the community 
protecting the owner, or those whom he authorizes, in the pos- 
sessio^i of the thing owned. As stated before, it is due, pri- 
marily, to the acquiescence of the members of the community 
in the undisputed possession or control of that which is an 
individual's property and, secondarily, to the readiness of 
the community to prevent others from depriving the individ- 
ual of that possession (67, 228, 324). 

Where possession is not subject to dispute, as in the case of 
the fictional Eobinson Crusoe, a right of ownership, that is to 
say, an exclusive right of possession, is not only without signifi- 
cance, but actually inconceivable. Possession in such case 
simply does not need to be protected. Ownership is not a 
natural right, by virtue of which the producer of a thing 
becomes its owner. This right is invariably a creation of the 
convention above alluded to. Unless law establishes this right, 
the producer of a thing is not its owner. It is true the present 
laws aim to concede ownership to the producer, but it has not 
always been so, and even now this ideal is in certain respects 
not fully realized. The product of a slave belonged to the 
master. When tithes were collected, only the product minus 
the tithes was retained by the producer as his property. Where 
taxes are collected on incomes, the producer has not the right 
of ownership to his entire productions. Land can be subject 
to ownership only by virtue of the laws that protect the owner 
against trespass. 

The protection of ownership which the owner of a thing 
has a right to claim, like that of all other rights, is furnished 
by the tribunals of law and the social forces back of them. It 



24 FUNDAMENTAL CONCEPTS [22 

would, however, be practically impossible for a court of law 
to keep track of what a man produces or earns, or what he 
buys or otherwise acquires. Certain rules have therefore been 
adopted to determine the property rights of individuals in 
case of dispute. According to these rules, possession is 
accepted as proof of ownership until convincing evidence to 
the contrary is presented. This principle is tersely expressed 
by the saying that "possession is nine points of the law." 

22. The State and Its Function. — Some power capable of 
protecting the weak against the strong is manifestly requisite 
for the maintenance of rights, and this power is exercised by 
the organization constituting the ''state" or "government," 
Rights can evidently rest secure only when there is a power in 
control whose authority is paramount. 

That statutory la^s are the formulation of mutual agree- 
ments of the members of the community is sometimes ques- 
tioned. Most laws have indeed been made before our time 
and we have had no choice but to submit to them. Even those 
laws that are made in our day are not made directly by the 
people; they are either dictated by autocrats or enacted by 
representatives elected for that purpose. Those who are 
opposed to any existing law, whether it has come down from 
our ancestors or has been enacted by contemporary lawmakers, 
are certainly not willing participants in the agreement. But 
we must consider, in view of the constantly changing composi- 
tion of the body politic through the accretion of new members 
and the dropping out of old ones, that mutual agreements 
among its members can stand only on condition that all those 
who are included in the membership shall acquiesce. The only 
alternative would be to rescind all law and proceed without 
government. Experience, however, has demonstrated that 
among men, constituted as they are, such a state of things is 
impracticable. We have therefore no choice but to adhere to 
the rule that all inhabitants of a country respect its statutes. 
These must be enforced, even though the offender be not a 
citizen. 

Laws should, of course, be of such a nature that no reason- 
able objection can be made to them. If there are laws which 



22] THE SOCIAL COMPACT 25 

do not come under this rule, they may be changed or repealed, 
and invasive conduct not already forbidden can be forbidden 
by new laws. It is true that even under representative govern- 
ment this cannot be accomplished by a minority, but if a 
valid objection to existing laws, or the desirability of new ones, 
can be clearly demonstrated, the majority will gradually be- 
come convinced of this defect in the statutes, and legislative 
reform along this line becomes merely a question of time. 

Attempts to effect such changes by violent means, as by 
revolutions, have generally led to irrational extremes, and 
the consequent reaction has restored the old regime with per- 
haps a few concessions. When reforms are desirable, changes 
in law should be constructive, not destructive ; in other words, 
faulty laws should be amended and rectified rather than re- 
pealed, where repeal would leave the community without judi- 
cial power to enforce some necessary regulation. 

Among the attempts to formulate rules for the guidance of 
law makers, the work of Herbert Spencer occupies a prominent 
position. According to his law of equal freedom: 

Every man has freedom to do all that he wills, provided he in- 
fringes not the equal freedom of any other man.^ 

This maxim is perhaps more accurately stated as follows. 
Every man sJiould have freedom to do as he wills, provided 
he infringes not the equal freedom of any other man. In 
other words, laws should interfere only with those acts of men 
which clearly constitute a breach of equal freedom or an 
invasion of the rights of others. But even this rule is not a 
definite guide, because opinion may differ as to what con- 
stitutes an infringement of equal freedom. There are acts 
which are considered invasive by some men and not by others. 
The boycott is an illustration. When such disagreement pre- 
vails, Spencer's rule fails. But it goes without saying that 
inequitahle laws cannot be in accord with equal freedom. 
It is therefore a good rule to make equity the test in deciding 
whether any given law should stand or fall. 

' Spencer, p. 121. See list of authors quoted. 



CHAPTER IV 
VALUE 

23. Significance of the Term. — A thing has "value" if 
men are willing to give other things in exchange for it, and 
the more of these other things it can command the greater is 
its value. 

The quantity of goods involved in an exchange is deter- 
mined by what virtually amounts to an agreement between the 
parties thereto, and the rate of exchange ruling in each agree- 
ment is more or less influenced by the rate at which similar 
exchanges have been made before. 

Value is almost universally considered to designate an 
attribute of exchangeable goods, but this is true only in a 
qualified sense. When used in its indefinite sense, the term 
is descriptive of the power of goods to command other goods 
in exchange, and this power is not alone dependent on the 
qualities inherent in the objects of exchange, but likewise on 
external circumstances. Thus an improvement in the ways 
of making an article, or even a change in fashion, may cheapen 
it, although its actual qualities remain the same. There is, 
however, no objection to regard value as an attribute of things 
which, in part, depends on external conditions, just as weight 
is a quality of matter depending on the proximity of the earth, 
toward which bodies gravitate. 

24. Distinction between Value and Utility. — In trying 
to grasp the meaning of "value," one immediately thinks of 
"utility," which signifies the capability of things to satisfy 
men's needs or desires (6). But though value and utility 
are closely related, they are not identical. For example, air 
is absolutely indispensable to us, but nevertheless has no value, 
because it is freely accessible to all, and no conscious effort 
is necessary to obtain a supply that suffices to sustain life. 

Earlier writers have emphasized this distinction by the 
26 



25] VALUE 27 

phrases "value in use" and "value in exchange,"* but 
** utility" is now universally employed in the sense of "value 
in use, ' ' and the term ' ' value ' ' confined to the idea of ' ' value 
in exchange " or " market value. " 

Nevertheless, confusion of the two terms, value and utility, 
is frequently met with. Thus the statement that "iron is 
more valuable than gold" is often made, when, evidently, 
useful is meant. Bishop Whately confounded utility and value 
when he wrote that "Pearls are not valuable because men dive 
for them, but men dive for them because they are valuable. ' ' 
The correct statement would seem to be : Men dive for pearls 
because they are useful, and being useful, they possess value 
because they cannot be obtained without the effort of the diver. 

25. Definition of Value. — It will be observed that the term 
"value," even if used only in the sense of exchange value, is 
really applied in two ways, the indefinite and the definite, as 
may be illustrated by the statements: "This thing possesses 
value" and "The value of this thing is two dollars." This is 
analogous to the established use of such words as length and 
weight. When we say that weight is a property of matter, we 
allude to the tendency of bodies to fall, but when we say that 
the weight of a body is two pounds, we compare its downward 
tendency with that of a standard pound. In the one sense the 
word designates a quality, in the other a concrete quantity. 

The statement that a thing has value may be interpreted 
that, if it is offered for sale, purchasers will be found willing 
to give something else in exchange for it. Value, in the 
indefinite sense, then, is that attribute of things which prompts 
men to make sacrifice to gain possession of them (40). The 
term is synonymous with "exchangeability." 

The statement that the value of a thing is two dollars 
informs us that in the market the specified thing and two dol- 
lars will be given one for the other. The exchange shows that 
the thing and two dollars are equally effective in the market. 
When applied in its definite sense, the term value denotes the 
exchange equality of two enumerated quantities. We might, 

*Cf. Smith, p. 21. 



28 FUNDAMENTAL CONCEPTS [25 

accordingly, say: " This thing is economically equal to two 
dollars," or "The economic equivalent of this thing is two 
dollars." Value, then, in its definite sense, is synonymous 
with equivalent. For the phrase **the value of " we may sub- 
stitute ' * that which is equal to " or " that which can be obtained 
for." 

This agrees with the use of the term in mathematics. The 
mathematician finds the value of the unknown quantity of 
an equation, or inserts numerical values for the literal terms 
of a formula. In the equation, A = 2, the number 2 is the 
value of A. 

One of the definitions given by MacLeod is as follows : 

The value of any economic quantity is any other economic quantity 
for which it can be exchanged.^ 

This fully covers the case. 

It is often said that value means exchange ratio. This, 
however, is an erroneous conception. Substituting the defini- 
tion of a word for the word itself should make a statement 
more clear. But to say that ''the exchange ratio of a thing is 
two dollars" would be without sense. 

It is a fundamental principle in mathematics that a con- 
crete numerical quantity is the product of two factors, the 
number or ratio and the denominator or unit. In the state- 
ment that the value of a thing is two dollars, ''two" is the 
ratio that exists between the value of the thing and that of 
one dollar. The thing is worth twice as much as a dollar. But 
while, indeed, the number "two" expresses a ratio, the 
phrase "two doUars" is no more a ratio than is the phrase 
' ' two yards. ' ' The word ' ' two ' ' and the phrase ' ' two dollars ' ' 
cannot be substituted for one another. It would be meaning- 
less to say that the value of this thing is two. Nor has anyone 
ever propounded the doctrine that weight and length are 
ratios, although in the statement, "The length of this rod is 
two yards," the number "two" expresses the ratio that exists 
between the length of the rod and that of a yardstick. 

"MacLeod, I, p. 223. 



26. 27] \ALVE 59 

Some economists take pains to warn their readers that 
"value" is not a thing. This is perfectly true when used in 
its indefinite sense. But when used in its definite meaning, 
that is, when the value of a thing is spoken of, this value is 
some other thing, say a certain amount of gold. The value, 
the equivalent, of an abstract quantity can only be another 
abstract quantity. But the value of a concrete quantity must, 
in the nature of things, be another concrete quantity. 

26. Market Value. — ^A thing can have a definite value or 
exchange equivalent only while it is being exchanged. Ex- 
change is the sole criterion of value. But on the basis of past 
experience, more or less completely recorded, the present value 
of a thing may be estimated, and since exchanges of a like kind 
are generally made at a more or less uniform rate, a market 
value may be assigned to staple articles, and this market value 
is that which we have in mind when we speak of stability or of 
fluctuation of values, according as consecutive exchanges are 
effected at a constant or at a varying rate. The study of the 
law of value, accordingly, embraces an investigation of the 
causes that govern the course of exchange rates. The value of 
some painting of an old master, or of some relic of antiquity, 
is of but little importance in the present inquiry. A law of 
value can be of practical use to the student of economics only 
by its application to the study of the distribution of the wealth 
created by industry. 

27. How Values Are Measured. — Comparisons can be 
made between things only with regard to such qualities as may 
be possessed in common by both objects that are being com- 
pared. Length may be compared with length, weight with 
weight, bulk with bulk. The economic comparison of things 
must accordingly be based on a common quality. Each of the 
things compared must possess exchangeability, or capacity for 
meeting a desire for its possession. Economic equivalence does 
not, however, imply physical similarity. Just as two objects 
may be equal in weight, although different in form, size and 
substance, so can two objects be economically equal, that is to 
say, evenly exchangeable, although they are dissimilar in 
every other respect. Geometric quantities are determined by 



30 FUNDAMENTAL CONCEPTS [28 

the process of mensuration: physical properties, such as 
weight, strength, elasticity, are measured by appropriate physi- 
cal tests ; and in order to measure the value of a thing, we bring 
it to market and observe its exchangeability . 

Economic measurements, when contrasted with physical 
measurements, possess one distinguishing feature. While in 
mensuration, in mechanics, and in other like branches the 
process of measuring quantities consists in comparing length 
with length, weight with weight, and so forth, the process of 
measuring value consists in the substitution of each of the two 
objects of exchange for the other. It is therefore proper to 
regard each of these objects as the economic equivalent — the 
value — of the other at the moment of exchange. 

28. The Unit of Value. — Although the value of any thing 
may be expressed in as many different denominations as there 
are other things for which it may be exchanged, it is currently 
expressed in terms of a particular commodity selected by con- 
vention, a definite quantity of which serves as the unit of value. 
The value of a coat may be twenty bushels of wheat, or a hun- 
dred pounds of meat, or five hundred grains of gold, but accord- 
ing to local usage its value is generally rendered in terms of 
"dollars" or other value units, which, as we shall presently 
see, generally means in terms of gold. The advantage of using 
a conventional unit is so obvious that even in the earlier stages 
of civilization this method of expressing values was in use. 
It is true that the selected commodity was not always gold. 
Within historic times such things as oxen, rice, tobacco, fur 
skins and silver have served the purpose. But in the course of 
time the metals gold and silver have proved their superiority 
for this use, and while in the earlier stages of commercial 
development silver was chosen as the criterion of market values, 
gold has supplanted it during the past centurj'^ in most civilized 
countries. In different countries different quantities of the 
selected metal are adopted as the units, knoAvn by their respec- 
tive denominations, such as dollar, pound, mark, franc, florin, 
peso, and so forth. The present American unit is the dollar, 
consisting of 25.8 grains of gold ®/io fine, or 23.22 grains of 
pure gold. 



29. 30] VALUE 31 

29. Price. — When things are offered for sale, the rate at 
which the merchant is ready to sell them is given in terms of 
the conventional unit, and the word ''price" is used in place 
of "value." Price, then, expresses the value of a unit quan- 
tity of the goods, stated in terms of the adopted value unit. 

It is self-evident that the price of the commodity selected 
for the unit of value will remain stable. By reason of this 
absence of fluctuation in price the metal selected is known as 
the "standard commodity." Care must, however, be taken 
to guard against a misapprehension. It is only the price of the 
standard commodity that remains fixed, not its value as com- 
pared with other things. 

In the following pages the dollar is taken as the unit of value 
and gold as the standard commodity. This is, however, not to 
be understood as precluding the use of other units of value or 
standard commodities. 

It would seem that these few words should conclude the 
discussion of this subject. But for some reason there exists 
a diversity of opinion not warranted by the simplicity of the 
case. Voluminous controversies have wrought needless con- 
fusion and have obscured a really simple problem. A brief 
review of some of the proposed methods for measuring values, 
and a statement of the objections to which they are open, is 
here in place. 

30. Labor as a Measure of Value. — That labor is a factor 
in the creation of value has been recognized by early writers 
on economics who inferred from this that labor is the natural 
yardstick of value (63a, 149). Adam Smith asserts that: 

Labour is the real measure of the exchangeable value of all com- 
modities.* 

Were it possible to define a unit of labor so that any one 
unit would have the same value as every other unit, this would 
perhaps be the most satisfactory measure of value. But the 
value of labor lies in its productivity, and productivity is not 
in proportion either to the duration of labor or to the amount 
of physical exertion. There are great differences in amount 

« Smith, p. 22. 



32 FUNDAMENTAL CONCEPTS [so 

and quality of things produced in equal time by different men 
employed on the same kind of work, and there are still greater 
differences where the kind of labor differs. We can obtain a 
conception of the value of labor only by its fruit. Until we 
learn what the values of the different products of labor are, 
we have no means of judging the value of the different kinds 
of labor that create them. And if products alone can measure 
the value of labor, labor cannot conversely gauge products. 
Hence it is impossible to adopt labor as a standard with which 
to measure the value of things (164). 

If there were no difference in the value of different kinds 
of labor, and if the productivity of all men engaged in the 
same kind of work were equal, the labor-hour might very well 
be used as a unit. This may occasionally be done for the sake 
of argument, but always with the reservation that all men 
are supposed to be equally efficient (32, 199) . 

Rieardo follows in the footsteps of Smith when he says 
(62): 

The exchangeable value of all commodities, whether they be manu- 
factured, or the produce of the mines, or the produce of land, is always 
regulated, not by the less quantity of labour that will suffice for their 
production under circumstances highly favourable, and exclusively en- 
joyed by those who have peculiar facilities of production; but by the 
greater quantity of labour necessarily bestowed on their production by 
those who have no such facilities; by those who continue to produce 
them under the most unfavourable circumstances; meaning — by the 
most unfavourable circumstances, the most unfavourable under which 
the quantity of produce required, renders it necessary to carry on the 
production.^ 

This proposition is defective in so far as the expression 
** quantity of labour" lacks a definite meaning. The "ex- 
changeable value" of a commodity can be expressed in terms 
of some other commodity, like gold or silver, but not in terms 
of labor. However, if in Rieardo 's proposition "cost of 
labor" or "cost of production, " properly deiined and qualified 
(61), is substituted for "labour," it becomes a correct, though 
incomplete, statement of the law of value (63&). 

^Rieardo, p. 37. 



31] VALUE 38 

Karl Marx, in propounding his theory of value as a basis 
of his scheme of socialism, has recourse to the labor-hour as 
a measure of value. His error in this respect will be more fully 
elucidated in Chapter VIII. 

31. Other Value Units. — When the values of two different 
things, or of the same thing at different times, are to be com- 
pared, these values must be expressed in terms of some one 
value denominator. Nevertheless, there are writers who dis- 
cuss the subject as though changes of value can be conceived 
independent of any stated value denominator. Among others, 
John Stuart Mill asserts that: 

AH commodities may rise in their money price. But there cannot 
be a general rise of values.' 

This statement is valid only if a certain proportionate 
fraction of the sum-total of all existing commodities is adopted 
as the unit of value. The sum-total of all wealth, unless its 
quantity be changed, will then have a fixed and invariable 
value. Only on this condition is it true that a rise in the value 
of one thing is balanced by an equal fall in the value of the 
sum of all other things, so that neither a general rise nor fall 
of values could ensue. 

Other economists, recognizing that the value of our present 
unit fluctuates in relation to all other things, propose an "in- 
variable ' ' value unit, without, however, specifying how this is 
to be established. These also, no doubt, have reference to a 
unit consisting of the sum-total of all wealth, or to a propor- 
tionate part thereof. But while such an idealistic unit may 
very well be adopted in hypothetical examples illustrating an 
argument (108, 119), it cannot be introduced in practice for 
several reasons. 

If a unit consisting of a proportionate part of all existing 
wealth were adopted, it could not long remain "invariable," 
in the sense that "there cannot be a general rise of values," 
since not only the quantity, but also the composition of the 
wealth in existence, is constantly subject to changes. Prom 
time to time new kinds of commodities, unknown before, appear 

* Mill, I, p. 540. 
3 



34 FUNDAMENTAL CONCEPTS [31 

upon the market. It follows that if a unit corresponding to 
the composition of the wealth of one period were established, 
it would not correspond with the composition of the wealth 
of perhaps a decade later. A periodical revision of the unit 
would therefore be necessary if an idealistic measure of value 
were to be maintained, and this would evidently not be an 
invariable unit. 

A second difficulty would be met in the attempt to define 
this unit, so that its composition might be on record. This 
would require the listing of all forms of wealth, with the state- 
ment of the proper amount of each, as they are to figure in the 
unit, and this is manifestly impossible. Some writers, recog- 
nizing this difficulty, have proposed a composite or multiple 
unit (321), consisting of a definite number of staple articles 
in definite quantities. The total value of the items is to con- 
stitute a standard sum, such as one hundred or one thousand 
dollars, according to the composition of the list. Of course, 
by this expedient only an approach to an idealistic unit could 
be attained. 

A third objection, which applies to composite units as well 
as to the supposed idealistic one, arises from the fact that most 
goods are produced in different grades of quality ( Ilia) . A 
given list of articles composing the unit would be an unreliable 
guide, even though an attempt be made strictly to specify the 
quality of each constituent, and the unit would be correspond- 
ingly indefinite. The case is different with gold or silver, 
the quality of which can be specified with absolute accuracy 
and tested as closely as it is possible to weigh on precision 
scales. This homogeneity of the precious metals has been 
the principal reason for their adoption as standards. A unit 
composed of commodities of more variable grades might give 
rise to frequent disputes as to the proper quality and, accord- 
ingly, the proper value of the unit. 

The fourth objection is a serious stimibling block to the use 
of either an idealistic or a multiple standard. There is no 
economic force by which the market value of things generally 
can become related to a prescribed unit of this kind. The 
things specified in any arbitrary list would be neither offered 



32] VALUE 35 

nor demanded in that particular combination, and in the 
absence of the ''standard commodity" as an article of mer- 
chandise, its exchange ratio with any one commodity would 
never become manifest in the market. The sum of the market 
values of all the articles specified in the list is supposed to 
remain unchanged, however each item may change in price; 
but if the movement of market values should at any time be 
such that this sum is changed, there is no way in which this 
condition could automatically react upon prices generally so 
as to restore the original sum. For gold as well as for silver 
there is a constant demand, so that the exchange ratio of either 
of these metals with other things is determined daily (54). 

There is still a fifth objection, namely, the difficulty of 
making the value of money conform to a given composite unit, 
but discussion on this point must be reserved for a later 
occasion (111&). 

32. Expediency of a Composite Unit. — Even if these diffi- 
culties could be surmounted, it would still be a question whether 
much could be gained by the introduction of a composite 
unit. So long as the unit serves merely to indicate the ex- 
change ratios of different commodities, or to compare one 
amount of wealth with another at any given time, it would 
be immaterial whether or not the conventional unit is subject 
to slow changes as compared with the sum of all other things. 
Changes in the value denominator can work injury only when 
a debt, expressed in dollars, or whatever the unit may be, is 
incurred at one time and paid when the unit has changed its 
value with regard to commodities generally. Let us examine, 
then, what injury may result through fluctuations in the pur- 
chasing power of the value unit. 

Owing to the fact that all things are constantly subject to 
changes in value, their owners must, as a matter of course, 
assume the risk of such changes. If a uniform change were 
to take place in the price of all commodities, the relative values 
of all forms of wealth, excepting the standard commodity, gold, 
would remain unchanged, and nobody would either lose or gain 
except those who hold gold or money and those who hold 
money claims or owe money debts. A general rise in prices 



36 FUNDAMENTAL CONCEPTS [38 

is simply an indication of a fall in the value of gold as com- 
pared with all other things, and vice versa. While prices in 
general rise or fall, the creditors' claims, being in terms of 
gold, will correspondingly fall or rise in general purchasing 
power, but the holders of money claims will lose or gain no 
more on this account than they would have lost or gained had 
they not loaned the money, but kept it in their possession as 
such. The owners of other forms of wealth must shoulder 
similar risks resulting from changes in the value of their hold- 
ings. Since gold is the commodity whose value fluctuates from 
natural causes probably least of all, the importance of pro- 
tecting creditors against loss from these slight fluctuations is 
less pressing than is often claimed. 

To the advocates of the labor standard of value the com- 
posite standard would be scarcely more acceptable than the 
gold standard. Let us consider, for the sake of argument, 
the case of a twenty-year bond expressed in terms of a mul- 
tiple standard, and assume that during the twenty years such 
progress is made in the industries that the effort required at 
the beginning of the term to produce the commodities specified 
in the standard list will at the end be reduced to one-half. 
Under these conditions the effort of one-half of one day 's work 
of the borrower (30) would pay a debt representing a whole 
day's work of the lender. 

While the gold denominator is not altogether free from 
objection, no available substitute appears to be preferable. 

33. The Theory of Value. — As has been said before, the 
value of things is ascertained from the rates at which they 
are exchanged. These rates are not a matter of accident, but 
are determined by certain existing conditions. The study of 
these conditions constitutes the most important problem of 
economics, since upon the process of exchange depends the 
distribution of wealth. 

At first glance the problem appears to present little diffi- 
culty. It would seem that the ratio at which any two com- 
modities are exchanged is simply an expression of the relative 
estimation in which these commodities are held by the parties 
to the exchange. But on further investigation it becomes 



34] VALUE ' 37 

- apparent that the problem is not quite so simple. In the society 
of to-day, composed of men and women of the most variant 
tastes and desires, of the most divergent abilities and disposi- 
tions, surrounded by the most unequal environments and 
opportunities, the estimations of any one thing by different 
persons are very far from equal. Even in the case of food, 
the most important product of labor, tastes differ widely ; and 
yet more striking differences can be observed in the varying 
desires for luxuries. While the appreciation of works of art 
is highly developed in some persons, it is more or less lacking 
or even totally absent in others. The craving for alcoholic 
drink or for tobacco becomes irresistible to those who use 
either habitually, while to others these things are repugnant. 
Nevertheless, as a rule, and especially for the great staples of 
production, there is but one market price for all comers. The 
prices of things are regulated in some way by the judgment or 
estimation of all buyers and sellers combined. The question 
before us is : How do these various evaluations in their com- 
bination determine the price of each commodity ? 

34. Supply and Demand Defined. — The adjustment of 
values in the market is generally attributed to the interaction 
of supply and demand. In order to discuss the subject intelli- 
gently it is necessary that we arrive at a clear understanding 
of what these terms really mean. 

"When we speak of supply and demand, it is with special 
reference to some particular kind of things or services, and in 
that sense supply denotes quantity offered for exchange. Hence 
supply involves an equal demand for other things, generally 
a demand for money through which those other things are 
obtainable. 

Demand is to be understood as effective demand, that is to 
say, not merely a desire for things, but a desire accompanied by 
the ability and readiness to give an equivalent in return, gener- 
ally in the form of money. Therefore, every demand involves 
an equal supply, just as every supply involves an equal demand 
(269). 

From this it follows that the total supply of all things 
and services in a market always equals in value the total effee- 



38 FUNDAMENTAL CONCEPTS [35, 36 

tive demand for all things and services. It is to be noted, how- 
ever, that this equality has reference only to the total market, 
but not to any particular commodity. When we come to con- 
sider some one commodity, it will be found that a disparity 
between supply and demand is not only possible, but is of fre- 
quent occurrence. 

While by far the greatest number of exchanges are now 
effected through money, we should always bear in mind that 
money is in reality nothing more than a medium for exchang- 
ing one kind of goods for another kind, and that, after all, the 
fundamental form of exchange is barter. Every buyer is 
necessarily a seller of that which he gives in payment, and 
every seller is a buyer of that which he receives in pay- 
ment (51). 

35. Subjective Valuation. — The analysis of the process 
by which the value of commodities is regulated is, for obvious 
reasons, to be divided into three stages. The first step will be 
a study of the relation of the individual to the goods he pro- 
duces and consumes, in short, of the conditions on which indi- 
vidual estimation depends. This will be followed by an ex- 
amination of how the respective estimations determine the 
exchange rate in barter between two individuals. We shall 
then be prepared for the final step — the deduction of the 
law of supply and demand, which rules the exchange rate 
among any number of individuals. 

Although values and prices can be expressed only in terms 
of something objective, they depend, in the last analysis, on 
human desires and aversions which are of a purely subjective 
nature. Production and exchange are really governed by the 
actions and reactions of these impulses, and it remains for us 
to find how the gap between the subjective and the objective 
is bridged. 

Production is regulated by two forces, the one impelling, 
the other restraining, and it is the interaction of these forces 
that determines subjective valuation. 

36. Desire the Impelling Force. — Things which have a 
capacity for satisfying human wants are for that reason de- 



37. 38] VALUE 39 

sired by human beings. Under the impulse of such desire, 
men labor and strive to gain possession of the things that 
satisfy wants. After an individual want is satisfied the desire 
ceases to be an active impulse, but it remains in a passive form 
which becomes active again with the passing of the gratification. 

Whenever some want is only partially satisfied, there re- 
mains a desire of some degree still in force as an impulse to 
action. 

Experience having taught that the gratification of a desire 
wears away, and that the want will recur with more or less 
certainty in the future, men are impelled to produce and 
accumulate, for future use, stores of things they want. Things 
that can be produced but seasonally are accumulated in quan- 
tities that will cover needs until the next season, but of the 
things that can be produced from day to day, only enough to 
suffice the passing need will be secured, unless there is some 
reason for acquiring more. 

Since an insufficient store of needful things will permit 
but a partial gratification of the desire for them, the impulse 
to further acquisition is the greater the more inadequate the 
store. 

37. Limitation of Demand. — The converse is equally true. 
A housewife, finding two loaves a day ample for her family, 
would not buy three loaves per day, even though the baker 
offered the additional loaf at a reduced price. She has no 
need for the third loaf, because the two loaves which she usually 
buys are all she wants. Of course, quantity must here be taken 
in its due relation to time. If the family were to spend the 
summer in the country where the baker calls but twice a week, 
the purchases would have to average seven loaves at each call. 
Thus, when we say that the desire to add to any given store is 
affected by the possession of a definite quantity of that store 
for future use, we must keep in view the element of time in 
that connection (60). 

38. Bohm-Bawerk's Illustration. — The cause of the de- 
sire being less when the store is greater has been shown by 
Bohm-Bawerk to be due to the diminishing importance of the 
several uses to which a thing may be put. He supposes a lone 



40 FUNDAMENTAL CONCEPTS [39 

colonist who has just harvested five sacks of grain (39). One 
sack just suffices to keep him from starvation until the crop of 
the following year becomes available. The second enables him 
to supplement his meals so as to remain strong and healthy. 
"With the third he purposes to feed poultry so as to have a 
variety of food. The fourth he reserves for making liquor, 
and for the fifth he knows no better use than to feed it to 
parrots whose antics afford him amusement. Here are enumer- 
ated five uses of varying importance. Had the colonist but one 
sack, he would value it very highly, as his very existence would 
depend upon it. Were he in possession of two, his desire for 
more grain would naturally be somewhat less, and every addi- 
tion would reduce his desire for more in the measure in which 
each further addition would be of less importance to his 
existence. 

39. Graphical Representation of Utility. — The principle 
here illustrated applies practically to all commodities. Were 
a man limited to but a small quantity of any needful thing, 
this quantity would be highly prized, as it would suffice only 
for the most urgent needs, and any additional supply would 
be prized less, inasmuch as it could only be used to satisfy 
less important needs (56a). The estimates thus accorded by an 
individual to the successive elements of his store, as they would 
be applicable to satisfy his desires of successively diminishing 
importance, may be graphically represented by the descending 
curve DD', Fig. 1, the successive elements being laid off on the 
horizontal axis of abscissas, while the vertical ordinates indi- 
cate the intensity of the individual's desire for each corre- 
sponding element or unit. 

This curve must, of course, be understood as representing, 
not the physical capacity of the one commodity under consider- 
ation to gratify desires, but the varying degree of desire for 
that commodity in the case of some one individual. It is also 
to be observed that the curve DD' represents not only the un- 
satisfied or active, but also the satisfied or passive desire for 
the commodity in question, and that only such portion of the 
desire which is not covered by the store already on hand will 
become effective as a desire for more. Hence, if Oq' is the 



40] VALUE , 41 

quantity already at command, the desire for the next element 
to be acquired would be equal to q'cZ' or Op' ; or if the quantity 
on hand should equal the abscissa Oq', the desire for further 
acquisition would be represented by the ordinate q"d!' or Op". 

In the illustration of the colonist (38) the store of grain 
was adapted for at least four different uses, each of which 
gratified a different desire. In the mind of the colonist these 
several uses presented themselves, according to their impor- 
tance, in descending progression, the several sacks being re- 
served, in succession, for these several uses. The first two 
served for plain food necessary to preserve life and strength. 
The desire of the next lower importance was met by the third 
sack, as it provided variety in the fare. The fourth and fifth 
sacks were reserved for still less important uses, in fact, for 
luxuries. 

If a commodity is adapted for several different purposes, 
it would be quite feasible to show in the diagram as many 
curves as there are independent uses, each cui've representing 
the desire engendered by one of the different utilities. But 
since the full desire for a thing develops from a sense of all 
of its various utilities, the desire in its totality should be repre- 
sented by a single curve. This curve can be plotted by adding 
the abscissas of equal ordinates of all the curves representing 
the several separate utilities (53, 56&). The same process can 
be applied to obtain a representation of the total desire if a 
new use is found for a thing. Let the curve EE' of Fig. 1 
denote the estimate of such a new use, then its geometric addi- 
tion to the original curve DD' will result in the new curve 
BD"^ which will then represent the total desire for the posses- 
sion of the thing in question. 

40. The Question of Quantity. — The desire of an individ- 
ual to acquire more of any given commodity depending, as we 
have seen, on the amount already at command, and on the 
relation which his desire bears to his store, represented by the 
curve BD', Fig. 1, this curve will serve to indicate the intensity 

° The compounding of the two curves is accomplished by making, 
in each horizontal section, the space m'n' equal to m». 



42 FUNDAMENTAL CONCEPTS [41 

of his desire for more, if the quantity he has on hand is given. 
Suppose the abscissa Og' to represent this amount. The line 
q[d' will then divide the desires which can be satisfied from 
those that cannot, and the ordinate g'cZ' measures not only the 
last of the desires that can be satisfied, but also the first of 
those desires which will remain unsatisfied, and this, in turn, 
measures the impulse to further effort toward increasing the 
store. 

This impulse manifests itself by a willingness to make 
some sacrifice in order to obtain the things desired, either by 
putting forth the effort to make them or by offering some 
product of effort in exchange for them (25). 

We have now traced the intensity of desire to two factors, 
of which the one is represented by the curve BB' and the other 
is the quantity at command. Of these the first is a character- 
istic of the individual whose desire for the commodity in ques- 
tion is represented, and this must be accepted as a fundamental 
factor. The other, namely, the quantity at command, may 
vary, but there is a certain quantity which he will accumulate 
under normal conditions. What is it that delimits this quan- 
tity? At what point will he stop accumulating? 

41. Reluctance the Restraining Force. — The store of any 
given commodity that an individual accumulates is, in the 
nature of things, limited, and, assuming normal conditions, 
the cause of that limitation is primarily the natural unwilling- 
ness of the human being to put forth the necessary effort of 
production. This reluctance is a restraining force, acting in 
opposition to the impelling force of desire. Production, then, 
is regulated by two opposing forces. The desire engendered 
by the prospective utility of any given product is the in- 
centive, the impelling force to its production, while the diffi- 
culty or strain of producing it is the reacting or restraining 
force. 

A commodity can therefore be viewed from two stand- 
points. To the consumer it represents utility; it offers the 
means of gratifying some desire. To the producer, on the 
other hand, it represents a certain amount of effort spent. 
The desire for a thing and the effort required to get it can 



42. 43] VALUE 43 

be compared only in the mind of one and the same person. 
Everyone who is on the way to obtain anything, whether 
through production or through exchange, contrasts in his 
own mind the satisfaction which he can get out of the thing 
against the labor or sacrifice necessary to get it. 

42. Graphical Representation of Effort. — While the im- 
pulse to obtain any thing diminishes as the quantity already 
at command is increased, the reluctance to produce more of 
a thing, on the contrary, increases with the amount already 
produced. The first hours of a day's work fatigue the aver- 
age workman but little. But as the day wears on, the labor 
becomes more and more irksome to him and often less effi- 
cient. The amount produced in the first hour requires less 
effort than that produced in the last, and the strain, as con- 
ceived by the worker, can be represented graphically. The 
ascending curve S8', Fig. 2, depicts the relation of the amount 
already produced to the reactive effect of the strain attending 
the production of more. 

43. The Point of Equilibrium. — Every producer is also a 
consumer, for he produces for the purpose of having things 
to consume. The man who himself consumes that which he 
produces naturally views his products from both standpoints. 
He compares the gratification they will yield, or the enjoy- 
ment they will bring, with the effort and strain which their 
production requires. This is also true of him who acquires 
what he wants in exchange for that which he produces, with 
this difference, that he gauges the utility of his efforts by the 
gratification he anticipates, not from the things he makes, 
but from the things he obtains in exchange for what he 
makes. 

The two opposing forces arising from desire to consume 
and from disinclination to exert one's self are instinctively 
felt and intuitively weighed by the individual. By combining 
in one diagram (Fig. 2) the curves DD' and S8', the mental 
contest between his desire for acquiring things and his re- 
luctance to exert himself is lucidly portrayed. It is clearly to 
be seen at what point the opposing forces come to a balance, 



44 FUNDAMENTAL CONCEPTS [43 

and to what extent the individual will apply himself to work, 
supposing him to be free to work as he will. 

Suppose, for instance, the diagram to represent the ease 
of a merchant tailor who can complete 6 coats a week if he 
works 5 hours a day, or 12 coats if he extends his labor to 
11 hours. It is here assumed that a doubling of the output 
requires more than twice the time, so as to include, even in 
this crude illustration, the effect of increased lassitude and 
the corresponding decrease of efficiency due to prolonged 
labor. The increasing disinclination to continue labor is repre- 
sented by the rise of the curve 88' . We may now assume that 
Oq represents 6 coats per week, and Oq" represents 12 coats. 
By working only 5 hours a day, the worker finds that g', the 
last increment produced, yields to him the gratification q'd', 
which, as the diagram shows, overbalances his disinclination 
q's' to continue working. The impelling force exceeds the 
restraining force. By continuing to produce the next follow- 
ing increments, the worker would obviously gain more in the 
form of gratification than he would expend in the form of 
effort, and he will naturally extend his hours of labor. But 
if he should work 11 hours per day to complete 12 coats per 
week, represented by Oq", he would find that in producing 
the last increment, namely, q", the required sacrifice q"s" 
would exceed the expected gain q"d". The restraint would 
exceed the impelling force. He will therefore intuitively 
choose the time of about 9 hours, producing the quantity Oq, 
namely, 10 coats per week, since the sacrifice of producing 
the last increment is equal to the benefit he can derive from 
it, both being represented by qa. 

The point a, where the two curves intersect, locates the 
last increment which, under the given circumstances, will be 
produced. This last increment is the one at M'hieh the desire 
for possession is exactly balanced by the aversion to perform 
the work required for its production. With the increase of 
the time of daily labor the restraining force gradually in- 
creases, while the impelling force steadily diminishes until, 
at this point, both forces are equal. So long as the desire 
for possession, as q'd', exceeds the dislike for work, as q's', the 



44] VALUE ' 45 

time of labor will be prolonged. Only when the degree of 
the sacrifice, the strain, becomes equal to the expected gratifica- 
tion will the natural limit of work be reached (238). 

Of course this result obtains only when the producer is free 
to choose the duration of his labor. When this is precluded by 
rules of employment, the time of labor will be subject to those 
rules. But, in general, these rules may be regarded as agreeing 
fairly well with the time limit which the average workman 
would choose of his own accord. 

The objection may be urged against these diagrams that, as 
a rule, men do not weigh their likes and dislikes with the 
nicety here assumed, and may not even be conscious of a 
graduated mental estimation as shown by the curves. Such in- 
definiteness of inclination might be indicated in the diagram 
by the use of curved bands instead of curved lines, the bands 
to shade off from centre to edge. The intersection would then 
be a field with a somewhat indefinite margin, analogous to our 
target with its scattered bullet marks (1). 

44. Choice as Regards Production. — Before passing from 
the discussion of the relation of the individual to production 
and consumption, a few points which have some bearing on our 
later investigation may profitably be taken up. Among them is 
the question as to what determines the choice of occupation of 
the individual. The answer to this question differs according 
to the degree in which the facility of exchanging the products 
of effort is present. 

A marooned sailor, for example, who has no opportunity 
for exchange whatever, first attends to his most imperative 
needs. He seeks first for fresh water, then for food, then for 
shelter. After any one of these needs is met, it is eliminated 
from his endeavors, and the one of next lower importance 
becomes predominant. During the first few days he can give 
but little time to the satisfaction of any one need before 
another claims immediate attention. He must frequently 
change the direction of his efforts to sustain life. Only after 
providing in advance for immediate necessities can he afford 
to keep on in any one line of effort and thus reduce the loss of 
time and energy attending every change of work. 



46 FUNDAMENTAL CONCEPTS [45 

On the other hand, a man who is living in a populous com- 
munity and who finds a sufficient demand for some one 
product to enable him to apply himself to a single occupation 
naturally chooses that one which, under the circumstances and 
according to his estimation, yields him the greatest returns for 
his eiforts (61). His choice depends not only on his in- 
dividual capacity, skill and inclination, but also on the oppor- 
tunities offered by the presence of natural resources, facilities 
of transportation, proximity and character of markets, and so 
forth. 

Most men are able to take up more than one kind of occu- 
pation, but each man's aptitude for different pursuits varies 
more or less. For each producer there is, as it were, an occu- 
pation of first, another of second, another of third choice, and 
so forth (149). Some men are capable of applying themselves 
with almost equal efficiency in more than one direction. To 
such it makes comparatively little difference which of these 
pursuits they follow, and a slight change in competitive con- 
ditions may cause them to turn from one occupation to another 
(223). The majority of workers, however, acquire proficiency 
in only one line. This is not always due to neglect or to in- 
ability to learn more than one trade or profession, but, on the 
contrary, is often a result of special talent or of exceptional 
opportunity. To such a change of their occupation would be 
quite disadvantageous. 

45. Choice as Regards Consumption. — When a man goes 
into the market to buy different things that he wants, he 
apportions his means to the several purchases in accordance 
with the urgency of his desire for each thing. The mental 
process by which he reaches a decision is not unlike that by 
which the marooned sailor determines the succession of his 
efforts. Guided by past experience, he divides his means so 
that the quantities of his several purchases will satisfy his 
corresponding desires to such a degree that the remaining 
wants are equal. 

The case may be illustrated by assuming that all his needs 
can be met by four different things. Let the curves DD' , EE', 
FF', and OG' (Fig. 3) represent his desires for these things, 



46] VALUE 47 

and let the line Jih' represent the level to which his means 
enable him to satisfy his wants. The quantities of his pur- 
chases will then be Oq, Oq', and Oq", respectively. The desires 
remaining unsatisfied are then measured by qd, qe, and q"f. 
It will be noted that the level hh' is above the highest point of 
the curve GG', which would indicate that under the given cir- 
cumstances the goods represented by this curve are beyond his 
means. Were his income to increase so that he could more 
completely satisfy his desires, the line Kii would go to a lower 
level and the goods G would be brought within his reach. 

46. Advantages of the Graphical Method of Study. — The 
many advantages which diagrammatic representation affords 
in the study of scientific data have led to the application of this 
method in many fields of investigation. Diagrams not only 
serve to represent facts in a perspicuous manner, but also to 
facilitate the analysis of various subjects, and when designed 
for the study of one phase of a problem, they are often found 
applicable to other aspects of the matter. So it is with our 
diagram (Fig. 2). 

Let us take the case of a man who both produces and con- 
sumes the amount Oq. The ordinates of the successive ele- 
ments of the ascending curve 88' represent the increasing 
strain of the effort necessary for the corresponding increase 
of production. As work is continued, the total measure of 
the effort expended is represented in the diagram by the area 
0qa8. 

Similarly, his evaluation of the total satisfaction obtained 
from consuming his earnings is represented by the area OqaD, 
and the net satisfaction derived therefrom equals the differ- 
ence of these two areas, which, in the diagram, is represented 
by the three-sided figure 8aD. We thus have a graphical 
representation of the net amount of satisfaction experienced 
by the worker, quantitatively stated. 

Or let us consider the case of a man who produces more 
than he consumes, saving the remainder for possible emer- 
gencies. If he carries on production to the point q'' (Fig. 4), 
and consumes only that portion of it represented by Oq% the 



48 FUNDAMENTAL CONCEPTS [47 

evaluation of his total effort will correspond with the area 
Oq"s"S, and that of his total satisfaction with the area Oqd'D. 
Such illustrations might be further multiplied, but the 
examples given are a sufficient guide for other possible uses 
of this method of investigation. 

47. Barter. — Our next step is to analyze the process by 
which exchange rates in simple barter are determined. This 
occurs when owners of different things come to an agreement 
to make an exchange. Such agreements are reached after a 
more or less conscious comparison, by both parties, of the 
benefit to be derived from the thing obtained with the sacrifice 
involved in parting with the thing given. 

The simplest case is that of two men, removed from markets, 
who wish to exchange part of the products of their labor. Sup- 
pose two settlers, one having cultivated wheat, the other wine, 
desire to make an exchange. What is the process by which they 
come to an understanding regarding the rate of exchange? 

The curves thus far used for illustrating our line of reason- 
ing represent the degree of an individual's impulse and re- 
straint. So long as we were analyzing the relation of one 
single individual to production and consumption, only that 
individual 's feeling could be taken into account. It was neces- 
sary to leave the comparison of a satisfaction — enjoyment of a 
utility — with a strain — productive effort — to the judgment of 
the individual. But now, when we come to examine the likes and 
dislikes of two persons, these cannot be compared unless we 
find a way of rendering them in terms of some concrete de- 
nominator. And since the contemplated exchange of wheat 
and wine is a case of simple barter, either of the two com- 
modities can serve as the value denominator. 

By selecting a bushel of wheat as the denominator, the 
desire for wine is to be estimated in terms of wheat. The 
wine-grower would then be the seller, the wheat-raiser the 
buyer. The wheat would be the medium of payment — ^the 
"money," and the wine the subject of purchase — the "mer- 
chandise. ' ' 



48] VALUE 49 

48. The Buyer's Price Limit. — The problem now before us 
is to learn how each of the men compares his desire for wine 
with his desire for wheat. This task would seem to present 
some difficulty, inasmuch as the desire of each for wine as well 
as that for wheat differs in degree according to quantity in 
hand (36-38). How can we compare one variable desire with 
another ? 

Suppose that in Fig. 5 the horizontal dimension represents 
gallons of wine, while the vertical dimension represents the 
estimate of wine per gallon in terms of wheat, the scale of 
valuation being marked off in bushels and pecks. 

Let us assume the wheat-raiser's desire for wine to be such 
that, could he obtain no more than one gallon, he would be 
willing to lose 3 bushels of his store of wheat rather than go 
without the wine. His valuation of the first gallon is, accord- 
ingly, 12 pecks of wheat. But he would not buy 2 gallons at 
this rate, for his desire for the second gallon is not so great as 
that for the first, and the additional 3 bushels of wheat which 
he would have to give up are regarded by him as of more im- 
portance than the first 3 bushels of his stock which he was 
willing to give for the first gallon. For 2 gallons he would not 
agree to give more than, say, 51/^ bushels, which would make 11 
pecks the rate per gallon. The acquisition of each additional 
gallon of wine would be attended by a reduction of his desire 
for more, while his reluctance to part with each further bushel 
of wheat would increase. For 3 gallons he would perhaps re- 
fuse to give more than 30 pecks, or 10 pecks per gallon. For 
4 gallons he might offer 36 1^ pecks, or 9i/^ pecks per gallon. 
His valuation of 5 gallons might be 41 pecks, corresponding 
with a rate of 8V5 pecks. Thus with each additional gallon to 
be added to his purchase the price he would be willing to pay 
per gallon would be reduced, and this reduction can be repre- 
sented by the descending curve DD', which depicts the wheat- 
raiser's desire for the merchandise "wine" expressed in terms 
of the denominator "wheat." It graphically represents what 
may be termed the "buyer's price limit," that is, the highest 
price he would be willing to pay for any one of the successive 
gallons of wine, provided always that this is the rate for the 
4 



60 FUNDAMENTAL CONCEPTS [49 

entire purchase, it serves to show how much the individual 
is willing to buy at any given rate. Were this rate equal to 
Op', he would buy the quantity p'd', that is, 7 gallons. If the 
price per gallon were lowered to Op", his desire for a store 
of wine would, under the given conditions, increase to the 
amount p"d", or 16 gallons. 

49. The Seller's Price Limit.— The mental process of com- 
paring wine with wheat on the part of the wine-raiser can be 
similarly examined. The first gallon that he would sell would 
be, of course, that one which he could most easily spare and to 
which he would give the least consideration, while the wheat 
he would get for it, being the first portion coming into his 
possession, would be most welcome to him and therefore most 
highly valued. We may assume that his evaluation of this 
one gallon of his wine would equal his evaluation of the first 
1^/2 pecks of wheat, and that he would agree to an exchange 
at this rate if he could not obtain it on better terms. But this 
does not imply that he would be willing to give 2 gallons for 
3 pecks, for he would naturally be more reluctant to part with 
the second gallon than with the first, while, at the same time, 
the second lot of wheat which he obtains would be of less im- 
portance to him than the first. He would perhaps be willing 
to accept 314 pecks, which corresponds to a price of 1% pecks 
per gallon. His estimate per gallon would rise as the number 
of gallons to be parted with increases. All this may be in- 
dicated by the curve 88' (Fig. 5), which represents the ** sell- 
er's price limit" in terms of wheat. At a rate equal to Op' 
his offer would amount to p's' gallons ; at the rate Op" his offer 
would amount to p"s" gallons. 

The curves of the diagram now represent the desire of the 
purchaser to acquire and the reluctance of the seller to part 
with the wine, measured in terms of the same concrete de- 
nominator, namely, wheat, and this enables us to consider the 
two men's estimates conjointly. 

This example may be taken as the prototype of many 
similar cases, all of which can be treated in practically the 
same way. The men may not have the objects of exchange on 
hand, but may expect to produce them, which would imply 



50] VALUE 51 

that the increasing reluctance to put forth greater effort takes 
the place of the increased reluctance to diminish the store on 
hand. Or, instead of merely two kinds of goods, a greater 
number may be included in the problem. One of them may 
again be chosen as the denominator, but the problem itself, 
while becoming more complicated, would present no essen- 
tially new features. At all events, the case here considered 
is typical of all direct exchanges of labor's products. 

50. Exchange Rate in Barter. — We are now prepared to 
follow up the process by which the two traders reach an agree- 
ment regarding the rate of exchange. 

During their negotiations they may at first try to agree 
upon the price Op' (Fig. 5), namely, 7 pecks. At this price 
the buyer would want to take 7 gallons of wine, as measured 
by the space p'd', while the seller would want to sell the greater 
amount p's', namely, 15 gallons. He finds, however, that he 
cannot persuade his neighbor to increase his purchase except 
by lowering the proposed price. Had the negotiations initially 
been based on a price equal to Op", or 1 bushel per gallon, 
the buyer would have been ready to take p"d", that is, 16 
gallons, while the seller would have been unwilling, at that 
price, to sell more than p"s", or 11 gallons, and only by 
agreeing to a higher price is the buyer able to induce the seller 
to part with a greater quantity. In the first case the negotia- 
tions tended toward a lowering of the price, in the second 
toward a rise. The evident tendency is toward a price equal 
to Op or qa, namely, 5 pecks. At this price both men will 
agree upon the quantity measured by the space Oq, namely, 
12 gallons. 

This, then, is the natural price under the assumed premises. 
That price is at the point where the want of the one party for 
the wine and the want of the other party to the wheat coin- 
cide. It is located at the intersection of the curves of the 
diagram and indicates not only the price, but also the quantity 
of the exchange. 

It is true that traders are perhaps never actually conscious 
of any such mental process as that above outlined and by 
which an agreement on the price is finally reached. But how- 



52 FUNDAMENTAL CONCEPTS [5i. 62 

ever the negotiations may proceed, each of the parties in- 
tuitively follows his inclinations, and it is these inclinations 
that have heen graphically represented in the diagram. 

We have here, of course, left out of account chance factors, 
such, for instance, as a possible difference in the power of 
persuasion, or capacity of salesmanship, which may affect the 
result one way or the other. The proposition is true only as 
regards the average. 

51. Buying and Selling. — In the above illustration wheat 
has been adopted as the denominator of value, and wine has 
been treated as the merchandise of which the price was under 
consideration. What would have been the result if we had 
chosen wine as the denominator and the means of payment 
and wheat as the merchandise ? 

The two men would merely have changed places as buyer 
and seller. A graphical examination of their respective wants 
would require the tracing of a curve denoting the wine- 
grower's desire for wheat in terms of wine, and another repre- 
senting the wheat-grower's reluctance, also in terms of wine, 
to dispose of his wheat. But, manifestly, we would then have 
had to deal with quantities that are the exact reciprocals of 
those considered in the first instance, and the ordinate of the 
point of intersection of the curves would have been the nu- 
merical reciprocal of the corresponding result previously ob- 
tained; and since the price of wheat in terms of wine is the 
reciprocal of the price of wine in terms of wheat, the final 
conclusion regarding the exchange rate would be identical 
with that of the first case. 

It is thus apparent that it is immaterial which of the two 
ways is adopted. The terms ''buyer" and "seller" are not 
only correlative, meaning that where there is a buyer there 
must also be a seller, but they are also reciprocal, meaning that 
each buyer is also a seller (34, 52). Every buyer of one 
thing is a seller of that which he gives in payment; every 
seller is a buyer of that which he receives in payment. 

52. The Market. — We now enter upon the third and last 
stage of the study of value, namely, the process by which 
values are determined in the general market. 



BS] VALUE 63 

Since it is impossible to compass extended commerce by 
means of simple barter, recourse has long ago been had to a 
process of complex barter through some medium of exchange 
(83), and instead of one kind of g'oods being exchanged for 
another directly, it has become universal practice to give 
goods or services for money, and then to use the money to 
procure other goods. The final outcome is, however, nothing 
more than the exchange of goods for goods. 

In barter there can be no specific distinction between buy- 
ing and selling. But where a medium of exchange is used it 
has become customary to apply the term "buying" to the 
giving of money for goods, and the term "selling" to the 
giving of goods for money. This distinction is, however, 
purely conventional. The law that governs exchange rates 
is as controlling in sales as it is in barter. It still remains 
true that the seller of goods is a buyer of money, and the buyer 
of goods a seller of money. In the last analysis, the terms 
remain both correlative and reciprocal (51). 

The general market may be considered as being composed 
of numerous market centres, each of which is again divided 
into sub-centres. In our present analysis it may be prefer- 
able to consider a merely local market. Such a market is sup- 
posed to include only a limited number of buyers and sellers. 
In point of fact, however, in so far as all markets are in 
communication, practically all kinds of merchandise can be 
had in any of them. 

As regards any one kind of goods, we find in the market 
a certain number of individuals seeking to buy them, and a 
certain number of others offering to sell them. It is the inter- 
relation of these buyers and sellers that we have next to 
review. 

53. The Common Value Denominator. — It has been 
shown before (39) how evaluations represented by several 
curves may be compounded. But this can be done only if 
the evaluations represented by these curves are expressed in 
identical terms. When studying an isolated exchange, we 
were free to adopt as denominator either one of the things to 
be exchanged. But if our present inquiry were to refer, for 
instance, to the value of wine, which is desired not only by 



fi4 FUNDAMENTAL CONCEPTS [64 

the farmer, but also by the butcher, the baker, and others, 
we could not compound the various estimates of wine by the 
would-be buyers if one estimate were expressed in terms of 
bushels of wheat, another in terms of pounds of meat, and a 
third in terms of loaves of bread. It will be necessary to have 
all these evaluations expressed in terms of the same denom- 
inator. This is equally true as regards the evaluations by the 
would-be sellers. In the actual market this difficulty is met 
by the use of the conventional unit of value, the dollar, the 
mark, the franc. The evaluation of the unit, both from the 
viewpoint of the producer and that of the consumer, becomes 
so fixed in the mind of each that it serves as a standard by 
which the value of other things is estimated, 
. 54. Appraisement of the Value Unit. — Each man's 
estimate of the worth of a dollar is primarily traceable to his 
experience in the market. A workman learns to know how 
much of his labor is required to earn a dollar, or how many 
dollars he can obtain for a week's work. An artisan, by 
selling his products, obtains a conception of the relation which 
his efforts bear to the unit of value. Experience also gives an 
idea of the amount of satisfaction to be derived from a dollar 
when applied to purchases in the market. In this way the 
dollar becomes, to all who have to buy or to sell, a standard 
for measuring both effort and gratification of every kind. 

Experience, however, is not the final criterion of the value 
of the unit. In the last analysis the faculty of the dollar — 
that is to say, a specified amount of gold — to serve as a 
measure of effort must be traced to the effort required for 
the production of the gold of which the dollar consists, and 
its faculty to serve for measuring gratification must be de- 
rived from the capacity of gold to actually gratify desire. 
Yet, in any given market, there may not be a single person 
who is mining gold, and perhaps but a few who desire this 
metal for industrial or other purposes. How, then, can those 
who neither produce nor actually use this metal obtain a 
correct estimate of its capacity as a measure for either effort or 
gratification ? 

In the case of exchange by barter we had tentatively 



55] VALUE 55 

assumed that the seller of goods is the producer, while the 
buyer is the consumer, and that through direct intercourse of 
producer and consumer the value of the goods is determined 
(58). But, in point of fact, the merchant who sells goods to 
the consumer is only the last one of a number of those who 
have contributed their efforts to the production of the thing 
sold. Producers and consumers are, accordingly, not in that 
direct contact which we have tentatively assumed. This does 
not, however, vitiate our conclusion. In the course of pro- 
duction the goods really pass by way of exchange through 
quite a number of hands, and it is through these exchanges 
that an economic contact, so to speak, is established between 
producer and consumer. Those through whose hands the 
goods pass in the process of exchange obtain a true idea of 
their value through experience in the market. And through 
the same kind of experience as that which gives a merchant 
knowledge of the value of goods in which he deals, though he 
may be neither producer nor consumer of these goods, every- 
body learns to appraise the dollar both as a measure of effort 
and of gratification (31). 

55. Interdependence of Prices. — Suppose we are to de- 
termine the value, in terms of dollars, of a single commodity, 
say wine. In order to do so we have to assume that its various 
evaluations by the farmer, the butcher, or the baker are stated 
in terms of dollars. As indicated before (47-48), these men 
can express their several desires for wine in terms of wheat, 
meat, or bread, respectively, but in order to express these 
desires in terms of dollars they must have knowledge of the 
prices of wheat, meat, or bread expressed in the same terms, 
for otherwise neither farmer, butcher, nor baker could have a 
conception of what a dollar is worth. The question at once 
arises: On what ground can we assume the price of all com- 
modities other than the one under examination to be known 
before we have found how the price of any one of them is 
determined? This question has, accordingly, to be answered. 

The conditions under which market prices become estab- 
lished have prevailed for ages. Upon examining the records 
of the past it is found that the prices of most products, 



56 FUNDAMENTAL CONCEPTS [56 

especially of staple articles, usually fluctuate, within narrow 
limits, above and below a mean rate which, changes but gradu- 
ally and which bears a close relation to the effort of producing 
things. But when a new article is brought into the market, 
its price does not at once conform to this rule, and is often 
subject to considerable fluctuations which only gradually sub- 
side until the price reaches a comparatively uniform level 
bearing the normal relation to the effort of production. 

This would indicate that prices of different things in the 
market are not determined independently, but are the result 
of a gradual adjustment to prevailing conditions. And the 
law of value, being an expression of the process of this adjust- 
ment, can do no more than state the general conditions under 
which equilibrium of prices prevails. We are therefore 
justified in taking the market as we find it and confining our 
inquiry to the question whether the current price of any 
given article under given conditions has a tendency to rise, to 
fall, or to remain stationary. It is therefore quite admissible 
to assume that the wine-grower, the farmer, the butcher, the 
baker, and, in short, all possible sellers and buyers of wine, 
can gauge their estimates of wine and, in fact, of any other 
commodity, in terms of dollars, the value of which they have 
learned to estimate by past experience in the market. 

56. Price Limits Compounded. — "When the price limits of 
all intending buyers of certain goods in a market are rendered 
in terms of the same denominator, the dollar, and repre- 
sented by curves like the curve BD' of Fig. 5, they can be com- 
pounded, as previously shown (39&) and represented by a 
single descending curve. Similarly, an ascending curve is ob- 
tained by compounding the price limits of all intending sellers 
of these goods. 

Since the resulting curves would become very much 
elongated, we must adopt a reduced scale for quantities meas- 
ured on the horizontal axis, so as to bring the diagram of 
combined price limits within practicable bounds. In this way 
we obtain the curves DD' and ;S'^' of Fig. 6, which depict the 
combined price limits of all the buyers and all the sellers in 



66] VALUE 67 

the market. The significance of these curves may be further 
elucidated as follows. 

As regards any one community, there can be, at any given 
time, only a definite quantity within reach of the market. 
These goods are owned by a number of individuals, some pos- 
sessing a greater, others a less quantity of them. 

The total quantity of these goods may be considered as 
consisting of a large number of equal integral parts or 
elements, of which each owner possesses a certain number. 
Different owners place different estimates on their respective 
goods and, indeed, each owner attaches a different degree of 
importance to each of the elementary parts of his store (39a). 
Every one of these elementary portions is thus neld at an 
evaluation of its own. 

We could have obtained the curve 88' by supposing all 
elementary portions of the commodity within reach of the 
market — whether held for use ^" or held for sale — to be spread, 
figuratively speaking, on the horizontal axis of the diagram 
(Fig. 6), arranged in a rising order of their evaluations, with 
the latter marked off as ordinates. 

In like manner as we divided the goods supplied into 
elementary parts we can, for the purpose of analysis, imagine 
each supplier of the goods to be divided into as many ele- 
mentary sellers as there are elementary parts of his goods (16) . 
Each such part would then be owned by one of these ele- 
mentary sellers who is correspondingly located on the curve 
8S\ The first one of them would be willing to sell the part 
he offers for a price equal to 08, if he could not obtain more ; 
but he would not sell for less, this being his "price limit" as 
a seller. The price limit of the second is slightly higher, and 
each following elementary seller's price limit is consecutively 
greater, as indicated by the ascent of the curve 88'. 

It will be understood from the method of constructing the 
curve ;8';8" that every one of the actual sellers who holds a 

*"lt may here be assumed that all owners of things which are not 
for sale may be induced to sell if the price offered is high enough. 
These things, though not offered for sale, are, accordingly, held at some 
price limit, whatever that may be. 



58 FUNDAMENTAL CONCEPTS [56 

number of elementary parts, each at a different price limit, 
is supposed to consist of the same number of elementary sellers 
located at various points of the curve. 

In the same way as the curve S8' represents those who 
have goods to sell, the curve DD' represents those who desire 
to purchase these goods. Inasmuch as some of the purchasers 
will buy a greater, others a less quantity, and as the degree of 
their desire for each part they want is different, we must con- 
sider each one of these buyers divided into a number of 
elementary intending buyers corresponding to the number of 
parts he desires to buy. Every one of these elementary buyers 
will then have a definite price limit of his own. 

Arranging all elementary buyers in a falling series of their 
price limits and assigning to each an ordinate equal to his 
limit, we get a descending curve which is identical with the 
curve DD' of Fig. 6 as previously obtained. 

Just as the curve 88' represents the sellers' price limit, or, 
more correctly speaking, the increasing price limits of the 
consecutively located elementary sellers, so the curve DD' de- 
picts the buyers' price limit, or the gradually diminishing 
price limits of the consecutively placed elementary buyers 
(62). Every one of the actual buyers of the market is repre- 
sented by a number of points scattered over the entire curve 
DD'. 

It is manifest that the buyers' price limit measures desire, 
which, in turn, is prompted by the utility of the goods. Hence 
the curve DD' represents utility, as estimated by the con- 
secutive elementary buyers, expressed in terms of the con- 
ventional value unit. 

Similarly, the curve 88' represents the varying degree of 
reluctance of the intending sellers to part with their goods. 
But this reluctance can be viewed in two ways. When the 
causes which determine the momentary or current price are in 
question (59), we must take into account not only the funda- 
mental factors of the case, but also temporary conditions, such 
as irregularities in the supply or in the demand, from what- 
ever cause. In this case the curve 88' must be held to include 
all goods of a kind within reach of the market. But in study- 



671 VALUE 59 

ing the causes that determine normal prices, in examining the 
conditions under which production is continued uniformly, and 
under which the price tends to remain unchanged, we can con- 
sider only the main fundamental factor, namely, the strain 
of the effort required to produce the goods for sale. In this 
case the sellers' price limit is the least price that will induce 
the sellers to subject themselves to the strain of production. 
Hence the curve 88' in this case represents the strain of 
effort, and applies not only to things that have already been 
produced, but also to those that may be produced whenever 
conditions favor their production (60). 

57. Relation of Supply and Demand to Price. — Owing to 
the inconstancy of human likes and dislikes, as well as to 
changes in the methods of production, the curves 88' and DD' 
are subject to incessant changes. But if we are to study the 
causes involved in the process by which the value of com- 
modities is determined, we must, at least for the time being, 
consider these actuating causes as fixed and as definitely 
known. We are therefore justified in assuming the curves 
88' and DD' as fixed, without regard to possible subsequent 
changes. On the basis of these premises we must exclude from 
our present considerations all of those changes in the market 
which influence the course of these curves. 

The conditions represented by the curves 88' and DD' being 
assumed, the amount of a given commodity that will be offered 
for sale depends upon the prevailing price, and the curve 88' 
represents the relation which the market supply bears to that 
price. All those elementary portions of the commodity of 
which the price limit is below the prevailing price will be 
offered for sale, while the remainder will be retained by the 
owners. 

Similarly, the amount demanded in the same market will 
increase as the price falls and decrease as the price rises, and 
the relation which the amount demanded bears to the pre- 
vailing price is indicated by the curve DD'. Of all the desires 
of various degrees depicted by this curve, those which are 
equal to or greater than the reluctance to pay the prevailing 
price will become effective in the market. 



60 FUNDAMENTAL CONCEPTS [68 

If the prevailing price equals Op', the quantity supplied 
will equal p's' and the quantity demanded p'd'. Or if the price 
were as low as Op", the supply would amount to p"s" and the 
demand to p"d". These curves, then, may properly be regarded 
as curves of supply and of demand, for they depict how those 
quantities are affected by the prevailing price (62). 

58. The Law of Value. — It is manifest that business con- 
ditions can be considered as normal only if the amount of 
goods produced and put upon the market equals the amount 
sold. The supply wiU then equal the effective demand. ^^ 
Whenever more of the goods are supplied than demanded, as 
would be the case if the price should equal Op' (Fig. 6), the 
excess remains unsold on the hands of the sellers. In their 
effort to sell they compete with one another, and the price 
comes down. This lowering of the price reacts upon the 
market so that the amount supplied will be reduced and the 
amount demanded increased, and this process will continue 
until the quantities supplied and demanded become equal. On 
the other hand, suppose the amount demanded at any time 
to exceed the amount supplied, as would be the case if the 
price equals Op". All who are disposed to sell at that low 
figure will have sold their goods before all buyers are supplied. 
In their efforts to purchase, the intending buyers wiU com- 
pete against each other, causing a rise of the price, which is 
eventually followed by an increase of the supply and a de- 
crease of the demand, and this will continue until the quantity 
supplied and the quantity demanded become equal. 

A glance at the diagram shows that equality between the 
amount supplied and the amount demanded can persist only 
if the price equals the ordinate qa of the point a at which the 
two curves intersect. The ordinate Op therefore represents the 
rate to which the price will tend. 

The law of value, or, more properly, the law of price, 

"As a matter of fact, the amount of goods brought to market 
usually slightly exceeds the amount actually sold. In the process of 
selling a small percentage may perish or otherwise become unsalable 
(13). The difference due to this cause is here ignored. Its effect on 
prices will be discussed later (219). 



58] VALUE 61 

accordingly involves two propositions: (1) a rising price of 
any commodity tends to increase the supply of, and to reduce 
the demand for, that commodity, while a falling price has the 
opposite effect; and (2) an excess of the amount supplied 
over the amount demanded causes the price to fall, and vice 
versa. The natural result is that the price of a commodity will 
always tend to that point at which the amount supplied equals 
the amount demanded. 

It should be observed that the law of value, or, as it is often 
called, the law of supply and demand, has reference really to 
the exchange rate of two commodities or sets of commodities. A 
law of supply and demand is conceivable only if two separate 
commodities are held in view. In the case of the two settlers we 
studied the exchange rate of wheat and wine, and when we 
came to consider the general market for wine we found a way 
to substitute the standard commodity, gold, for the wheat of 
the preceding illustration. 

Like all economic propositions, the law of value indicates 
only general tendencies, and departures from the indicated 
result may occur in either direction. But whenever such de- 
partures do occur, a tendency to restore normal conditions at 
once comes into play. 

It may be well to call attention to the fact that we have all 
along considered the buyer to be the consumer and the seller 
the producer (54). We have taken into account only the con- 
sumers' demand, namely, that which arises directly from a 
desire for gratification; and only the producers' supply, a 
supply which, for natural reasons, requires the stimulus of a 
recompense, and which is regulated by the relation which that 
recompense bears to the effort (115, 153). In the absence of 
extraneous restraint, desire for gratification and reluctance to 
exertion are, indeed, the only factors in the determination of 
value (63). 

As intimated above, the conditions which govern supply 
and demand undergo change from time to time. For example, 
production may be made easier through an invention, or the 
demand may be affected through a change in fashion. The 
curves 88' and DD' will then change their course, and the 



62 FUNDAMENTAL CONCEPTS [59 

point of intersection will shift in consequence. According as 
these influences are of a temporary or of a persistent nature, 
they have a correspondingly brief or lasting effect on prices. 

59. Current Price. — As already stated, the total of all 
things that are at any given time within compass of the 
market is always limited (56). Some of these things are for 
sale at the current price, others are held for a rise, and again 
others are held for use and are not for sale, except, perhaps, 
at an unusual price. For the time being, each element of 
the total supply is held at a definite price limit. There is 
also a demand composed of a number of elementary demands, 
each having a certain price limit. 

If 0^ of Fig. 6 represents the total of any particular kind 
of goods, the curve SS', embracing the sellers' price limits 
of these goods, cannot go beyond Q. The range of price 
limits of both sellers and buyers being given in the form of 
the curves SS' and DD', the tendency of the price is toward 
the rate Op, which equals the ordinate of the point a of 
intersection. 

Both curves of the diagram cut each other in two. The 
branch Da of the demand curve embraces all the buyers who 
find goods in the market at a price below their limits and, 
therefore, at a price acceptable to them. The buyers near the 
initial point D of the curve find the price materially below 
that which they would be willing to give rather than go with- 
out the goods, while those near the point a find the price but 
slightly below, or practically equal to, their respective price 
limits. The intending buyers on the branch aD' are those who 
will not buy, because their desire for the goods, as repre- 
sented by their price limits, does not come up to the ruling 
price. We are here speaking of elementary buyers and not of 
actual persons. If the diagram were, for example, to refer to 
food products, this conclusion would not mean that high prices 
would cause any one to go without food. It must be remem- 
bered that a real individual, being here assumed as divided 
into a number of elementary persons, is represented by a 
number of points distributed over the curve, and the branch 
aD' embraces only those of his desires which, because of the 



591 VALUE 63 

high price, remain unsatisfied. A high price may cause some 
to retrench and, if need be, go on short allowance of food, but 
not without any. 

The branch Sa of the curve of supply embraces those sellers 
who find the market price more or less above their limits and 
who, therefore, offer their goods for sale, while the section 
aS' represents those who decline to sell, preferring to retain 
their goods for their own use or for a better market (108). 

Only the goods embraced beween and q will be marketed. 
The sellers included in the branch Sa will dispose of their 
goods to the buyers included in the branch Da. As these ex- 
changes proceed, the buyers included in the branch Da become 
possessors, like those included in the curve aS', and by com- 
bining all these possessors and placing them in a rising order 
of their price limits, in other words, by compounding the 
curves Da and aS', the curve p8" is obtained, which embraces 
all possessors of the goods who will not sell, because they 
prefer the goods to the price. 

At the same time, the elements of the curve 8a, namely, 
the sellers who have disposed of their goods, will be in the 
same class as the intending purchasers who decline to buy 
because the ruling price exceeds their limits and who compose 
the branch aD'; and by proceeding to combine both classes 
into one, the curve pD" is obtained. This curve, accordingly, 
embraces all who have none of these goods in their possession. 
Further exchanges thereupon cease, because the price limits of 
the possessors exceed those of the intending buyers. The price 
remains the same as before, namely. Op, the point p being now 
at the junction of the two new curves. The price does not 
change so long as the respective price limits and the total 
amount of the goods remain the same. 

If there were no subsequent changes, such as will be dis- 
cussed presently, this would be the end of all buying and selling 
of the goods in question. Those whose price limits are higher 
than the prevailing price will remain the owners, and those 
whose price limits are lower than that price will go without 
them, the point of division being determined by the quantity of 
goods within reach. The curves p8" and pD" show approx- 



64 FUNDAMENTAL CONCEPTS [60 

imately the condition that prevails with respect to things that 
cannot be reproduced at all, such as old coins, rare editions of 
books, and the like. 

In a measure, like conditions arise periodically with regard 
to things of which the production is intermittent, such as farm 
products. Even though a crop may be a partial failure, the 
farmers usually have a greater quantity of their products on 
hand than they need for their own use, and their evaluation 
of their surplus, gauged on the score of utility to themselves, 
is materially lower than that of intending buyers. But the 
total quantity brought to market being below the average, the 
market conditions are such as presented in Fig. 7 by the 
curve BE', where the distance OQ' represents the total quantity 
in stock. A glance shows the reason for the high prices, 
measured by q'a', in years of poor crops. The sale of the goods 
will then for the time being bring about conditions similar 
to those depicted in the curves pS" and pB" of Fig. 6. 

On the other hand, an unusually abundant crop, indicated 
in Fig. 7 by the curve TT', often depresses the market price 
to a point where it does not pay to transport all the products 
to market, and farmers have at times allowed part of their 
crops to rot in the field, or have otherwise destroyed them or 
put them to an inferior economic use. 

In the actual market the buying and selling even of such 
goods as cannot be reproduced never comes to a complete 
standstill. There will be changes in the conditions of the 
market due to the mutations of life, like sporadic changes of 
fancy, vagaries of fashion, death of owners, the advent of the 
rising generation, any of which disturb the equilibrium, so 
that some of these goods reappear from time to time in the 
market. 

6o. Normal Price. — When we come to goods that are con- 
sumed by the buyers, while new goods are supplied by the 
producers, exchanges continue indefinitely. Former buyers, 
after consuming the goods purchased, reappear as buyers. 
Former sellers, after replenishing their stock, again appear as 
possessors and sellers. 

The current prices of such products are subject to the 



60] VALUE 65 

momentary supply of the goods in question and to the imme- 
diate demand. Both supply and demand are constantly in- 
fluenced by fortuitous conditions apart from those that regu- 
late production and consumption, conditions that give rise to 
the well-known irregular but mostly inconsiderable fluctuations 
of market values (278). 

But apart from adventitious circumstances, both supply 
and demand are subject to fundamental conditions which 
determine average or normal prices. In order to learn what 
determines the average or normal supply and demand, we 
have to delve into the ulterior conditions that regulate the 
continuance of supply and demand, namely, production and 
consumption, apart from the merely accidental influences that 
cause at most temporary departures from normal conditions. 
When the law of normal prices is to be traced, we must ascribe 
to the curves 88' and DD' a significance different from that 
heretofore ascribed to them. The horizontal abscissas must be 
understood as measuring a stream or current, that is, quantity 
per unit of time instead of simply quantity (37) . The ascend- 
ing supply curve 88' (Fig. 6), then, indicates how production 
is stimulated by a rising price, while the descending demand 
curve DD' depicts the coincidence of increasing consumption 
with the falling of the price. Instead of asking at what price 
a seller is willing to part with his goods, we must inquire what 
effect price has on the continuance of production. Instead of 
asking at what price a buyer is willing to purchase, we must 
inquire what effect price has on continuance of consumption. 
We have now to deal with dynamic and not with static con- 
ditions. 

When things are taking their normal course, the rate of 
production continues uniformly. Only when the market be- 
comes disturbed by some cause of a permanent nature will the 
production of the goods in question be increased or reduced. 
At present we shall consider only the normal case, leaving the 
study of such disturbances for a later stage of our discussion 
(221). The ordinates of the successive elements of the curve 
88' then represent the lowest recompense at which the various 
producers continue to produce and supply the market, and 
5 



66 FUNDAMENTAL CONCEPTS ' [61 

the curve DD' the highest cost at which the different con- 
sumers continue to consume. The section Sa of the supply 
curve S8' represents those producers who, while the price 
equals Op, continue to follow their vocation and keep the 
market supplied, while the branch a8' comprises those who 
could produce the goods in question, but who find other occu- 
pations more remunerative (56). 

"When we come to a study of the distribution of wealth, the 
causes that regulate normal values will alone have to be con- 
sidered, since the problem deals with the regular course of 
economic activity apart from merely temporary influences. 

6i. Cost, the Sellers' Price Limit. — It is apparent that a 
man will continue to work in a given occupation only so long 
as he cannot, with equal effort, earn more in some other 
direction. He will seek to follow that line of employment in 
which the efforts he is prepared to put forth receive the highest 
reward (44). 

It is equally evident that the compensation he may be able 
to obtain for equal exertion in his occupation of second choice 
determines the lowest recompense he will accept in his chosen 
occupation he fore he will abandon it. This, then, is his price 
limit as a seller of his labor. 

When a man works in one direction, he virtually gives up 
that which he could earn if he applied himself with equal 
effort to some other occupation. His earning capacity in this 
latter direction, in his occupation of second choice (215), may 
therefore quite appropriately be regarded as the cost of his 
labor, it being that which he sacrifices in producing what he 
does. It is that which determines labor's price limit (62), 

The cost of labor to the worker is, however, not to be con- 
fused with the value of labor, that is, the cost of labor to an 
employer. The value of labor to the employer is equal for 
equal productivity, while the cost of labor, from the stand- 
point of the worker, namely, his price limit, is the lowest 
recompense he will accept before changing the direction of his 
work. 

Different workers naturally have different price limits, 
which, accordingly, can be represented by the rising curve 



611 VALUE 67 

S8' of Fig. 6, and the value of their efforts is at the point of 
intersection of this curve with the curve DD' representing the 
demand for such services, whatever the price limit of any- 
single worker may be. "Workers who can earn nearly as much 
in their occupation of second choice as they can in their chosen 
occupation are located at or near the point a of the inter- 
section, while those who are skilled in but one occupation and 
who can make a change only at a disadvantage, are situated 
nearer the origin ^S* of the curve. 

This view of the case applies particularly to wage earners 
and to those artisans who do not employ assistants. The cost 
of producing things becomes more complex where the speciali- 
zation of labor enters into the problem. Employers of labor 
must buy their raw materials and supplies, pay wages and 
cover the regular charges for the use of the land, of the capital 
goods — ^namely, appliances and material — and of the money 
needed in carrying on their business. And if cost is to be 
considered from their standpoint, there must be added to these 
items the "cost" of their own labor, namely, their possible 
earnings in their occupations of second choice. This total cost 
determines their price limit, for if the income of their business 
falls below this point, they will endeavor to get into that 
other line of activity in which they can earn more. 

For the same reason that we assume equal products in the 
same market to command equal prices, we must also postulate 
that labor which accomplishes equal results commands equal 
wages, independent of the time or exertion spent in doing the 
work, and independent of the price limits of the individual 
workers. The cost of the use of land and of other capital is 
also assumed to be, in general, proportionate to the advantages 
these afford to the users. 

Let us imagine a number of individuals who are nominally 
owners of various business enterprises, but who do not take 
any part whatever in conducting their business, nor furnish 
any part of either the land or the capital necessary (144). 
They have accordingly to employ the manager as well as all 
other workers, to rent the land required in the business and to 
borrow the capital needed, all at market rates. All these 



68 FUNDAMENTAL CONCEPTS [61 

nominal owners are accordingly on the same basis, none con- 
tributing in any degree to the success of the business, either 
by work or by capital, and since all are dependent on the same 
market for procuring the factors of production, the cost of 
producing equal quantities of a commodity is normally equal 
for all. It will be observed that "cost of production" in this 
sense differs from its colloquial meaning. It includes the 
market value of aU services, those of the organizer and man- 
ager and those of the landowner and of the capitalist as well 
as wages of employes and all other expenses. 

The several items constituting cost in this sense are : cost of 
raw materials, supplies, etc., including depreciation of means 
of production ; cost of labor, or wages ; cost of the use of land, 
or rent; cost of the use of capital goods, or capital interest; 
and cost of the use of money, or money interest. When all 
factors of production are accounted at their market value, the 
line 88' of Fig. 6, representing cost of production or the 
sellers' price limit, becomes a horizontal line. It is to be re- 
membered that here, as before, chance variations from normal 
conditions are to be ignored. 

We can therefore conceive the line >S'>S^' as an ascending 
curve only if one or another of the items constituting the 
total cost is not included at its market value. Thus, when 
the value of labor or the law of competition (148) is under 
consideration, the line 88' must be held as representing cost 
in which labor is not accounted at its normal market value, 
but at the lowest point at which different workmen will con- 
tinue to work before turning from their occupation to some 
other, in short, at their price limits. Since the price limits 
are different for different workers, the line 88' then ceases 
to be horizontal. 

So in examining the value of the efforts of managing em- 
ployers, we must compute the cost of the products of their 
business from all business outlays, including cost of materials, 
wages of employes, rent of land and interest of aU other capital 
needed, to which are to be added their price limits as employers, 
namely, their earning capacities in occupations of second choice. 

When we come to study incomes from land (173), the 



62] VALUE 69 

sellers' price limit is to be viewed from the standpoint of the 
landowners. Cost of production is then made up without 
regard to any recompense for the use of the land, all remain- 
ing items being counted in at their full market value. 

And when we come to study the earning power of capital 
goods, that power can be analyzed only by excluding from 
**eost" all charges for the use of capital goods (186, 257). 
In this way we obtain cost from the capitalists ' standpoint. 

In the study of the conditions which determine the net 
incomes of workmen, of employers, of landowners and of 
capitalists we have always to eliminate from the total cost the 
particular item which is under examination. Cost so accounted 
determines in each case the "sellers' price limit" (30). 

62. Cost and Utility Theories of Value. — We have learned 
to view the curves 8S' and DD' of Fig. 6 in three different 
ways. They represent, respectively, the relation of supply and 
demand to current price (57), the sellers' and buyers' price 
limits (56), and effort or cost of production and utility of the 
product (61). To be sure, these are merely three different 
aspects of the same functions. 

When the two curves are viewed with regard to effort and 
utility, they point to conclusions that have a definite bearing 
on the two most widely accepted theories of value, namely, the 
labor or cost theory and the utility theory. 

The curve 88' is drawn to illustrate the increasing strain 
of effort of production, which finds its concrete expression in 
the increasing "cost," as production is carried on under in- 
creasingly unfavorable conditions. The ordinate qa of the 
point a has significance from several points of view. It repre- 
sents not only the effort required where production is being 
continued under the most unfavorable circumstances, but also 
represents the normal value of the product (180, 257). In- 
asmuch as these two quantities are represented by the same 
ordinate, they must be equal. It is therefore evident that 
normal value equals the effort of production where it is being 
continued under the most unfavorable circumstances. This 
is clearly a confirmation of the "labor" theory of value, as 



70 FUNDAMENTAL CONCEPTS [62 

promulgated by Ricardo (30) and known as the classic theory. 
Its variant is the ' ' cost ' ' theory. 

In this theory two data are assumed to be known, namelj', 
first, the "quantity of produce required," that is, the quan- 
tity demanded; and second, the variable effort or cost of 
supplying the various elements of that quantity. Referring 
to Fig. 6, these data are the quantity Oq and the curve SS'. 
It is further assumed that the supply will naturally be adapted 
to the demand, so that the point a locates the most unfavorable 
point at which production must be continued to supply the 
demand. This theory is therefore applicable only when the 
normal price prevails and the supply has adapted itself to the 
demand, but is not applicable when the current value differs 
from the normal value. 

The effort expended, or the cost of production, at the point 
q, which is the last element brought into use in order to supply 
the normal demand, has been denominated the "marginal 
effort" or "marginal cost," and the most unfavorable point at 
which production is normally continued is called the "margin 
of production" (148). 

The purport of the curve DD' may be similarly analyzed. 
Viewing this curve as representing utility, the diagram points 
out that of the entire quantity of the goods brought to market 
the first element will go to gratify a desire equal to OD, the 
second a desire of a slightly less degree, and so on. All the 
later elements will cover consecutively less urgent needs, and 
the last one, at the point q, will satisfy the least important 
of all the desires that can be gratified by the available quan- 
tity of the goods Oq. But the ordinate qa of the last element 
q of the market supply, which is the measure of that least im- 
portant desire, represents the price also. This agrees with 
what is known as the modern, the utility theory of value, which 
has been so admirably elaborated by Bohm-Bawerk. According 
to that writer the value of things is measured* by the impor- 
tance of that concrete want which is least urgent among the 
wants that are met from the available stock.^^ 



'Cf. Bohm-Bawerk, II, p. 148 (157), 



63] VALUE 71 

This theory assumes as known two independent data, 
namely, first, the "available stock," represented by Oq of 
Fig. 6, and second, the series of possible ''wants" which this 
stock can satisfy and which is represented by the curve DD', 
the least urgent want satisfied by the supply being qa. The 
theory fails to elaborate the conditions which determine the 
normal supply and is therefore applicable only to current or 
temporary market value, and incidentally to normal value only 
when the actual supply happens to equal the normal supply 
(153). 

The importance of the least want that can be satisfied by 
the available stock, in other words, the utility of the last 
portion of the supply, is known as the "final" or "marginal 
utility." 

63. Both Theories Corollaries of the Same Proposition. — 
We here find confirmation of two value theories which are 
generally regarded as incompatible. At first glance it would 
indeed appear that only one of them could be correct. If value 
be a function of effort, how can it be dependent on utility? 
And if determined by utility, it would seem to be independent 
of labor or effort. Yet, here we find both theories confirmed. 
We have arrived at two apparently conflicting conclusions. 

But the explanation of this apparent incongruity is not 
far to seek. In a normal market final or marginal utility and 
marginal effort or marginal cost are always equal quantities 
(150). The point a of Fig. 6, where the curves of effort and 
of utility meet, may be considered from two standpoints. It 
is that point of the effort curve S8' at which the utility curve 
DD' intersects it. But it is also that point of the utility curve 
DD' at which the effort curve 88' intersects it. Although the 
curves represent independent functions, the point a is common 
to both. Although utility and effort are independent concepts, 
marginal utility is not independent of effort, nor is marginal 
effort independent of utility. Every attempt to establish either 
of the two theories to the exclusion of the other betokens a 
failure to trace the law of value to its fundamental premises 
(30&). 

The statement that value is determined by supply and 



72 FUNDAMENTAL CONCEPTS (83 

demand would be more descriptive of the actual facts if ren- 
dered in the form that value is determined by cost and utility, 
conceiving cost to denote reluctance to exertion, the restraining 
force, and utility to denote desire, the impelling force. As 
we have seen, value tends to become adjusted to the point 
where the desire for any given product is balanced by the 
reluctance to making the effort of producing it (58, 115, 123). 

The labor or cost theory is incomplete in that the "quantity 
of produce required, ' ' — in other words, the quantity demanded, 
— is assumed as given, while it should really be traced to 
ulterior factors. A like fault is to be found with the utility 
theory, which assumes the "available stock," in other words, 
the quantity supplied, as being given. Both these quantities 
vary with every change of price, and being thus dependent 
on price they cannot be regarded as primary factors in the 
determination of price. In a normal market both are equal 
to the amount actually produced, and this amount is de- 
termined by a balancing process in which the likes and dis- 
likes of all buyers and all sellers come into play. Production 
proceeds no farther than where desire and reluctance, where 
impulse and restraint, come to a balance. The primary factors 
to which value is to be traced are the various individual evalua- 
tions. On the one hand is the diminishing desire for the 
gratification of consumption, which we have represented by the 
curve DD'; on the other the increasing reluctance to make 
the effort of production, which we have represented by the 
curve S8'. It is onlj^ by showing how these forces combine in 
determining the amount demanded and the amount supplied 
that the law of value is traced to its fundamental factors. In 
a normal market these two quantities are equal, as are also 
final utility and marginal cost, hence both the cost and the 
utility theory are true as far as they go. 

In this respect a possible misapprehension should be 
guarded against, and an analogy may be helpful to that end. 
We know that the speed of a steam engine is regulated by its 
governor. But it is the steam, not the governor, which is the 
cause of motion; the governor only regulates the speed by 
controlling the admission of steam. So is utility alone the 
active principle of value, inasmuch as it engenders the desire 



64] VALUE 73 

for things, while the strain of labor, the cost, is that which 
governs the quantity produced and so only regulates, but does 
not engender, the value of the products. 

Since the labor or cost theory cannot apply to things that 
cannot be reproduced — for instance, paintings of old masters 
— nor to a commodity of which the marginal cost has not be- 
come equalized with final utility (2^1), as is the case for a time 
with things the production of which is facilitated by a new 
invention, it is final utility alone which determines value in 
such cases. 

The cost theory is applicable only to staple articles and 
services, and then only under normal conditions of the market. 
There are cases in which the utility theory is quite inapplicable, 
the cost theory being the one which alone applies (64). 

The notion that labor is a measure of value, as enunciated 
by Adam Smith (30a), although corrected by Ricardo, con- 
tinues to be quoted in the incorrect form, which is to the 
effect that the value of things is determined hy the amount of 
labor required i7i their production (164). This proposition 
was indeed adopted by Karl Marx as the basis of his theory 
of value. But, as shown by Eicardo, it is true only for things 
produced at the margin of production and is accordingly valid 
only in a sense so limited that its application as a general 
economic law leads, as a matter of course, to untenable con- 
clusions. 

64. Illustrations. — When applied to special cases, the dia- 
gram represented in Fig. 6 may have to be modified so as to 
adapt it to the conditions of the case. 

When commodities are of such a nature that they do not 
admit of indefinite subdivision, the "curves" will assume a 
step-like form. Should we desire, for example, to represent 
the market for horses, the diagram would take the form sug- 
gested in Fig. 8, in which each step represents a horse. The 
conclusion that the "point of intersection" of the two 
"curves," namely, the stepped lines 88' and DD', marks the 
rate toward which the price tends, is as true here as in the 
case of continuous curves. However, a glance at the diagram 
plainly shows that the "intersection" is not a point, but the 



74 FUNDAMENTAL CONCEPTS [64 

short vertical line aa', since the two ' ' curves ' ' actually coincide 
for that distance. Supply and demand will therefore balance, 
whether the price of horses is equal to qa or to qa' or anywhere 
between. In this case the price is really indeterminate be- 
tween the points a and a'. 

In the diagram Fig. 8 only a small number of units is 
shown. As a rule, a large number of units is involved. The 
step-like elements of the "curves" will then be comparatively 
small and will virtually disappear in a graphical representa- 
tion. Continuous curves may therefore be used in practically 
all cases. 

We have seen that a change in the prevailing price of a 
commodity affects both its supply and its demand, but we have 
not yet considered the extent to which either is affected. Were 
we to examine the behavior, in this respect, of a number of 
commodities, we would find a marked difference among them, 
A change of a given percentage of price will affect the supply 
and demand of some commodities more than of others. Fur- 
thermore, a like change of prices affects the supply and the 
demand of many commodities unequally. There are things of 
which a rise or fall in the price is followed by a considerable 
change in the supply and no great change in the demand, and 
there are other things in regard to which the opposite is true. 
In the case of some things we meet with extreme conditions. 
There are some commodities for which the amount demanded 
is almost entirely independent of the price, and there are 
other things of which the amount supplied remains practically 
unaffected as the price changes. 

As an instance of the first kind we may mention certain 
drugs. The demand for any one of them is due to the prev- 
alence of the disorder for which it is a specific. A falling 
price will not appreciably increase the demand, and it would 
require a considerable rise in the price before even the poorer 
patients would go without the medicine. There is competition 
only among those who supply the goods, and since the supply 
is governed by the cost or effort of production, this cost de- 
termines the value. Diagram Fig. 9 applies here and shows 
that it is the curve SS' which in the main decides the ordinate 
of the point of intersection (63, 153). While in ordinary 



65J VALUE 75 

cases it is immaterial whether we measure value by marginal 
utility or by marginal effort, in this case it is the marginal 
effort which is the predominating factor. However, the quan- 
tity demanded is decided principally by the range of utility, 
represented by the buyers ' price limit DD'. 

The other extreme may be illustrated by certain wines 
which can be raised only in certain districts. The area of their 
cultivation cannot be increased, no matter how high the price 
may soar. If in a given year a certain number of gallons of 
such wine is produced and put upon the market, the vintners, 
guided by past experience, aim to adjust the price as high as 
possible without losing the chance of selling their entire output, 
in other words, ' ' as high as the traffic will bear, ' ' Were they 
to make the price too high, they could dispose of only a portion 
of their product, and, if too low, the demand would exceed 
the supply and they would find that a higher price could have 
been obtained. The diagram Fig. 10 graphically illustrates 
the case. Value is, then, regulated principally by the range 
of utility DD', while the quantity supplied is determined 
almost entirely by the limited facilities of production, depicted 
by the sellers' price limit S8'. 

Some writers. Mill among them, treat these extreme cases 
as though they were subject to independent laws of value, 
assigning one law to ' ' freely reproducible goods ' ' and another 
to "scarcity goods." Our examination, however, shows that 
this distinction is immaterial, as both eases are obedient to the 
same law. The difference in the application of the law is 
simply due to a difference in the conditions peculiar to each 
case. 

65. Capitalized Values. — Before concluding the present 
discussion, it is desirable to take notice of a class of values 
which properly belong to a special category. In this we are 
obliged to anticipate some matters which logically relate to a 
later section of our investigation; we have to take account of 
the fact that money has the power to command interest. 

There are certain kinds of property, created by law or by 
private contract and not by labor, such as land ownership, 
franchises, special privileges and annuities, which have the 



76 FUNDAMENTAL CONCEPTS [65 

capacity to yield a continuous or periodic income. Property 
of this kind, which, is in the nature of a right, must be sharply 
distinguished from the income which it yields. The property 
itself, the right, not being consumable, cannot be considered to 
have "utility," and not being the product of labor, it cannot 
be considered to have "cost." But though devoid of both 
utility and cost, property of this nature is marketable and 
therefore possesses value. 

This value depends upon conditions different from those 
which regulate the value of consumable things, this latter 
being dependent on either final utility or marginal cost, both 
of which factors are absent in the case of law-created property. 
It is generally recognized that the bridge between the value 
of this class of property and the value of consumable things is 
money, by virtue of its power to command interest. The value 
of money, namely, its exchange ability with commercial com- 
modities, as well as its interest-commanding quality, will be 
fully discussed in their proper places. But it is through its 
interest-bearing quality alone that money can be compared 
with law-created rights which have the power to render periodic 
incomes. 

It is easy to understand that a right to a perpetual income 
from any source will normally fetch such a sum of money as 
is capable of returning an equal net income in the form of 
interest. In order to find the exchange value of such a right, 
we must compute, by the well-known process of ** capitalizing" 
the income, the sum of money which, at the prevailing rate of 
interest, would bring equal returns (181). Thus, an income 
of $100 per year, when the interest rate is five per cent., has a 
selling value of $2000. If the right is not perpetual, but 
limited to a definite period, its value follows certain rules of 
computation which are well known. 

It is often asserted that a thing can have value only if it is 
capable of returning an income. But, as we have seen in our 
foregoing discussion, the value of things produced by labor is 
not dependent on any income-producing power, so that values 
determinable by the process of capitalization can have refer- 
ence only to rights and privileges, but not to things produced 
by labor (360). 



CHAPTER V 

CREDIT 

66. The Nature of Credit. — The fact that instruments of 
credit, such as promissory notes, drafts, certificates of stock, 
and especially paper currency, possess exchange value has 
been variously interpreted. Although men of affairs, like 
bankers and merchants, who have to deal with credit in prac- 
tice, have substantially correct ideas about credit instruments, 
the theory of credit remains involved in a maze of academic 
controversy and in a confusion of conflicting ideas. Before 
we can proceed to study the subject intelligently, we must 
find what it is that really constitutes ' ' credit. ' ' 

Being derived from the Latin word "credere," to believe, 
"credit" primarily signifies reputation for trustworthiness. 
The reports of commercial agencies are information regarding 
such credit. The term has, however, come to be used in another 
sense, in which it describes the relation arising when com- 
mercial trust has been given, and this is the meaning with 
which economics has to deal. In this sense "credit" is 
equivalent to "claim," usually a claim to a specified sum of 
money payable at a specified future time. When a bookkeeper 
gives "credit" on his books for value received, he really 
records the amount the creditor has a right to claim at some 
future time. "Credit," then, is the correlative of "debt," 
just as "creditor" is the correlative of "debtor." The terms 
"credit" and "debt," accordingly, denote the same relation 
considered from opposite standpoints. Only in this sense can 
credit be regarded objectively, that is, as something valuable, 
as something which can be bought and sold, or which can be 
conveyed by instruments of credit. In point of fact, credit 
instruments are simply acknowledgments of indebtedness. 

It is not difficult to see that the right of the creditor is 
closely related to the right of ownership. In some respects 
both rights are alike, but how far the similarity goes can best 
be learned by first studying in detail the several features which 
characterize the right of ownership. 

77 



78 FUNDAMENTAL CONCEPTS [67 

67. The Right of Ownership Analyzed. — Since the right 
of ownership exists by virtue of the social guarantee to un- 
disputed possession (21), it naturally embraces all rights that 
such guarantee implies. The owner may use, change, consume 
or sell that which he owns, unless by doing so he injures others. 
If the object owned is one that is capable of being utilized for 
an indefinite period, ownership includes the right to its exclu- 
sive use during the entire period of its existence. 

The owner of a thing may sell it entirely, or he may sell 
any portion of his right to it. The latter happens, for in- 
stance, when a man rents a house to a tenant. The lease is 
invariably made for a specified period, which may or may not 
be extended after the expiration of the term. By leasing a 
property, the owner really sells a portion of his right to its 
exclusive use. But it is only the right of possession and use 
for a specified time that he sells; he retains all other rights. 
After making such a partial sale, he manifestly is no longer 
owner in the full sense of the word. It would, instead, be 
more appropriate to call him "lessor." Commonly, a lessee 
is not considered joint owner of the leased property, but from 
a rational standpoint we cannot escape the conclusion that 
the sum-total of the rights comprised in ownership is actually 
shared between lessor and lessee, and that the case is really 
one of joint ownership in a qualified form. A similar relation 
exists when a librarian loans a book to an applicant, or when 
the owner of a livery hires out a team to a customer for a 
specified time. In the following analysis the term "lessor" 
will be used to denote the owner of anything, the possession 
of which he has temporarily turned over to another. Although 
this term is not usually understood as applying to all cases 
where an owner has temporarily parted with the right of 
possession in favor of another, there is good reason for giving 
the term this broad scope. The right of the lessor is clearly 
a phase of ownership which has an important bearing on the 
study of credit. 

Leasing is, however, only one of the methods by which some 
part of an owner's rights is conveyed to another person. 
There are other ways in which the right of ownership may 



68] CREDIT 79 

be shared by two or more persons. Things may be jointly 
owned in specified proportions. This applies particularly to 
certain aggregates of things, like stores of goods, manufactur- 
ing plants, railroads and the like. Partners share the owner- 
ship of such aggregates of things in definite proportions. In 
stock companies the property is owned in shares by the stock- 
holders. Each partner, each stockholder, is owner of an 
aliquot part of the whole. 

All forms of joint ownership are subject to dissolution, 
either by special agreement or under the provisions of law. 
Partnerships are generally entered into for stated periods. 
While the agreement is in force, none of the partners has a 
right to either use, change, consume or sell any portion of the 
property jointly owned, except for and in behalf of the 
partnership. Inasmuch as the right of each partner to the 
possession of his share is for the time surrendered to the 
partnership, which figures as a separate economic person (16), 
we must regard each partner as lessor of his respective share 
rather than as owner. At the expiration of the term of the 
partnership any one of the members, having complied with 
the necessary formalities, may insist upon dissolution and the 
recovery of his portion. If the partners cannot agree upon 
some other method of division, any one of them can legally in- 
sist on the puMic sale of the property and the sharing of the 
proceeds. 

68. Credit Defined. — The right of the creditor exists by 
virtue of law which empowers him to take certain action in 
the event of the debtor failing or refusing to pay the debt 
when it matures. In that event the property of the debtor 
can be legally seized and sold at public sale, and the proceeds 
applied to pay the cost of the legal process and the claim of 
the creditor, the remainder being returned to the delinquent. 
Before the debt matures, the right of the creditor is analogous 
to that of a lessor, since he has no right to demand possession 
of that to which he has only an ultimate claim ; but after the 
debt falls due, if it be not paid, the creditor can legally insist 
on the public sale of the property of the debtor and the sharing 
of the proceeds. 



80 FUNDAMENTAL CONCEPTS [C8 

By comparing this right with that of a partner, it is seen 
that, with the difference of a few minor details, the right of 
the creditor is identical with that of a partner or joint owner 
(210). The main difference appears in the division of the 
proceeds. Instead of these being divided pro rata among the 
partners, they are so divided that the creditor obtains the 
amount due him, while the debtor, who was the reputed owner 
of the property sold, retains only the remainder. 

If it is appropriate to regard partners as joint owners of 
the property of the partnership, it is manifestly equally ap- 
propriate to consider creditor and debtor as joint owners of 
the possessions of the debtor, the sole difference being that the 
creditor, instead of owning an aliquot portion of the whole, 
owns a definite portion equal in value to the amount of his 
credit. His share is stated in a definite number of dollars, 
while that of a partner is a stated fraction of the aggregate 
property of the partnership. 

In view of this difference, the process of terminating the 
joint ownership of debtor and creditor varies in a few par- 
ticulars from that of dissolving a regular partnership. By 
his promise to pay a certain sum, the debtor really agrees to 
dissolve the joint ownership at the time specified by buying 
the creditor's share, the value of which is stated in the agree- 
ment. But if the debtor fails to make this purchase, the 
creditor can dissolve the joint ownership by selling, through 
legal process, enough of the debtor's possessions to liquidate 
the claim. 

In view of the creditor's right being virtually a form of 
joint ownership of the wealth possessed by the debtor, ** credit" 
may be defined as ownership without possession, or, to state it 
otherwise, joint ownership of wealth to which the debtor has, 
for the time being, the exclusive right of possession ; and con- 
versely, * ' debt ' ' as possession withoiit ownership, or, possession 
of wealth which is really owned, at least in part, by the 
creditor (21, 102, 299). We must, however, constantly bear 
in mind that before the debt falls due the creditor is only 
lessor and not full owner of his share, in other words, that 
the right of possession is held for a stated time by the debtor. 



69] CREDIT 81 

According to this reasoning a debtor is only the nominal 
or reputed owner of those of his possessions which are subject 
to seizure for any debt. The creditor owns a share equal to 
the debt, while the debtor really owns the remainder only. 
Moreover, a debtor, whose debts equal the value of all his pos- 
sessions, although nominally ownipg all, in reality owns no 
portion of that which he possesses, and furthermore, if the 
nominal amount of his debts exceeds the value of his pos- 
sessions, the real value of the corresponding credits is below 
par, being equal to no more than the actual value of those 
possessions. 

In the event of a third party going surety for a debtor, 
the amount of wealth subject to seizure is increased and the 
creditor becomes conditional part owner of the possessions of 
the surety. 

69. Three Forms of Credit. — Ownership can be shared in 
more than one way. The principal forms of division are (1) 
between lessor and lessee, (2) among partners or stockholders, 
and (3) between creditor and debtor. In the first form of divis- 
ion the lessor retains all rights with the exception of possession 
and use for a specified period, this right being held by the 
lessee. In the second form the several joint owners share the 
right in specified proportions, their respective shares being 
fractional parts of the value of the aggregate property. In the 
third form the creditor owns a certain portion, the value of 
which is expressed in terms of some commodity or service, 
usually in terms of the conventional value unit, while the 
debtor owns the remainder. Partners, however, like creditors, 
are really in the position of lessors as long as the partnership 
continues or the debt has not matured, and this is true 
whether the debt is payable on a stated day, or on demand, 
or at a time otherwise determined. 

The term "credit" is generally applied only to the third 
one of these three forms of divided ownership, but the essen- 
tial similarity of all three forms is more significant than their 
actual differences. Because of this essential similarity all 
forms of ownership without possession are in reality merely 
different forms of ** credit" and are here considered under 

6 



82 FUNDAMENTAL CONCEPTS [69 

that head. The first and third forms differ only in this: in 
the first, the identical object of the loan, in the third only an 
equivalent thereof is to be returned. The lessee of a house 
must return the identical house leased, the borrower of money 
need only return an equivalent sum of money. In all other 
respects debtor and lessee are on the same footing. As regards 
the second form, a certificate of stock is to all intents and 
purposes a credit instrument, being an evidence of ownership 
of wealth in possession of others. 

In view of the fact that credit is ownership without pos- 
session, and that the property of a debtor is owned by the 
creditor and the debtor conjointly, it is manifest that the 
value of this property is likewise divided into two parts, one 
being owned by the creditor, the other by the debtor. The 
share owned by the creditor, if expressed in terms of dollars, 
presents a feature which is worthy of special note. While 
the value of the entire property, expressed in dollars, may 
fluctuate, that portion of the property which is owned by the 
creditor is not subject to such fluctuation. Barring the ele- 
ments of discount and risk (76), this share remains at par 
with the standard of value. Whatever fluctuation may ensue 
in the value of the property falls on the share owned by the 
debtor. A rise in the value benefits him alone, just as a fall 
in value must be borne by him. Credit, therefore, if expressed 
in dollars, or whatever the conventional unit may be, is a 
value-magnitude which, though related to and derived from 
wealth of variable value, is nevertheless stable, at least in the 
sense in which the value of the standard metal gold is regarded 
as being stable. This is the fundamental reason why credit is 
just as well adapted as gold for use as money (88, 95, 115, 
125,294). 

The ownership theory of credit is by no means new. It is 
indeed the theory of common law. The creditor who is se- 
cured by mortgage is legally a conditional purchaser of the 
property. The banker, when called upon for a loan, informs 
himself as to what the property of the applicant would bring 
at a public sale. He knows that by lending he acquires a 



70] CREDIT 83 

conditional right to have this property sold, a right which 
primarily belongs to the owner. According to MacLeod : 

Credit is a right of action against a person to pay or to do some- 
thing " 

and a right of action, in this respect, embraces the right to 
have the debtor's possessions sold by legal process if he fails 
to pay. 

70. Divergent Conceptions o£ Credit. — Although this 
ownership conception of credit is the prevailing one in the 
practical world and affords a valid basis for further con- 
clusions, various other definitions of the term ' ' credit, ' ' which 
are at variance with this idea, are more or less authoritatively 
propounded. 

It is often held that credit owes its value to wealth to be 
produced or services to be rendered in the future. This view 
is apparently corroborated in many ways, for example, in the 
fact that some credit tokens, like railroad and theatre tickets, 
are redeemable in services which, in the nature of things, 
must be rendered after the tokens are sold. But if the issuer 
of such tokens fails to redeem them, the holder 's final recourse 
is to legal process, terminating, if need be, in the sale of the 
delinquent's possessions to the extent of the stated value of 
the tokens. Not the future service, but the existing posses- 
sions of the issuer, constitute the substance of the credit. 

According to another conception, of which MacLeod is the 
most consistent exponent, credit is a form of wealth, included 
in the class of ''rights," which is created whenever a debt is 
contracted. After describing how the Royal Bank of Scotland, 
in the eighteenth century, issued and loaned its notes to cus- 
tomers for whom others became surety, this writer continues: 

Now we observe that all these Cash Credits which have produced 
such marvellous results are purely in the nature of Accommodation 
Paper. . . . Thus we have an enormous mass of exchangeable 
Property created by the mere Avill of the Bank and its customers which 
produced all the solid effects of actual gold and silver, and when it has 
done its work, it vanishes again into Nothing at the will of the same 

" MacLeod, I, p. 220. 



84 FUNDAMENTAL CONCEPTS [71 

persons who called it into existence. Hence we see that the mere will 
of man has created vast masses of Wealth out of Nothing: and then, 
having served their purpose, were Decreated into Nothing}* 

We shall see later (123) that this view, erroneous as it is, 
is far more prevalent than is generally supposed, especially 
when applied to those credit instruments which constitute cur- 
rency. If the owner of a house rents it to a tenant, nobody 
would say that a second house is thereby created, the owner 
owning one house and the tenant occupying one, making two. 
Yet the reasoning of MacLeod and others is tantamount to 
such an inference. The value of a credit instrument is really 
the value of that fraction of the possessions of the debtor or his 
surety which is owned by the creditor. We must be careful 
not to confuse the nominal with the real, nor possession with 
ownership. 

71. " Possession" Versus "Ownership." — Failure to 
properly discern between ''possession" and "ownership" has 
given rise to a singular controversy. While most economists 
hold that the delivery of goods by A to B in exchange for a 
promissory note is virtually only half an exchange, the other 
half being effected in the future, namely, when B pays the 
note, others hold, on the contrary, that an exchange of goods 
for a promissory note constitutes a complete exchange, the 
note being an economic quantity of a value equal to the goods 
delivered. Thus, for instance, MacLeod says: 

Now, when a merchant makes a purchase with his Credit, it is not 
a " loan " of Capital . . . : it is an absolute Sale; just as much as 
if the purchase had been effected with money."* 

It would seem that only one of these views can be correct. 
But, as a matter of fact, both are correct in their way, for 
they are taken from different standpoints. If the question 
of exchange is viewed in a physical aspect, from the stand- 
point of possession, the delivery of goods by A for a promise 
of payment by B is undoubtedly an incomplete transaction, 
or half an exchange. The other half is not even accomplished 
when the promise is redeemed by the payment of the note, for 

"MacLeod, I, p. 402. "Ibid., I, p. 288. 



721 CREDIT 85 

the ultimate exchange, that of goods for goods, is only com- 
pleted, so far as A is concerned, when he uses the money so 
received in the purchase of goods. MacLeod's position is, 
however, correct if the transaction is viewed in its other aspect, 
namely, from the standpoint of the right of ownership. As 
soon as A delivers the goods he acquires a claim against B 
equal to the value of the delivered goods, and by virtue of 
that claim becomes joint owner in B's possessions. A has 
simply exchanged his right to the goods delivered for an equal 
right, as joint owner or joint lessor, to the possessions of B. 
He is no poorer by accepting the note — assuming it to be valid 
— than he would be had he received equivalent payment in 
money. 

72. The Substance of Credit. — A credit, conceived as the 
correlative of a debt, derives its value from the particular 
wealth which is subject to seizure and sale if the debt is not 
paid on time. When a credit is created, or, viewing the 
transaction from the opposite standpoint, when a debt is con- 
tracted, the debtor yields to the creditor a certain right to his 
possessions. In the case of some loans a portion of the wealth 
of the debtor is actually placed as security in custody of the 
creditor, who does not, however, thereby acquire the right to 
use this pledge. The value of such a pledge usually exceeds 
the value of the loan, and, in case of non-payment of the 
debt when due, the creditor may sell this security to reimburse 
himself. In the case of a mortgage the creditor obtains the 
right to attach certain specified property, against which the 
claim is recorded, while the property itself remains in pos- 
session of the debtor with the full right to use and even to sell. 
But if the debtor does sell the property, the right of the 
creditor to attach and sell it for the debt remains in force. 
When, however, no part of the debtor's wealth is particularly 
specified, then anything nominally owned by him may be 
attached and therefore constitutes that which during the con- 
tinuance of the debt must be considered as being jointly 
owned by both debtor and creditor, but which, for the time, 
the debtor has the exclusive right to use. The wealth subject to 
legal claim is the substance of credit. 



86 FUNDAMENTAL CONCEPTS [73. 74 

This explanation of the source from which credit derives its 
value might be questioned on the ground that loans are fre- 
quently made where there are no possessions on which to base 
the value of the corresponding credit, but which yet are 
ultimately made good through subsequent efforts of the debtor. 
Such loans, however, are obviously not business transactions 
in the true sense. They are in the nature of ventures or of 
acts of consideration or of friendship. Obligations of this 
nature have usually no definite value, and if they are made 
good in the end, all that can be said is that the risk assumed 
by the lender turned out in his favor, 

73. Superposed Credits. — "When stocks, bonds, warehouse 
receipts, and the like are given as collateral to secure loans, it 
would seem, at first glance, that these loans are not secured by 
actual wealth, since the collaterals are paper. But the value 
of these collaterals depends on the existence of some concrete 
wealth in the possession of somebody who does not really own 
it. The credit so assured, then, is in the nature of a super- 
posed credit. Credit instruments are fully competent to be 
used as "security" or "pledges" for further credit. That 
upon which the claim is founded may be traced from obliga- 
tion to obligation, but ultimately the trail must end in some 
existing concrete wealth to which the claim applies. "While 
in the case of loans the pledges placed in the hands of the 
lenders usually consist of paper evidences, like promissory 
notes, bonds, stocks, and so forth, the material wealth which 
directly or indirectly underlies these paper evidences is the 
real, the material security of the loans. Practically our entire 
monetary system is one vast complex of credit superposed 
upon credit (100, 102). 

74. Public Credit. — The theory that credit must be founded 
on tangible property subject to legal seizure is also true when 
applied to public debts, be they federal, state, or municipal. 
It is true that no court could issue a writ of attachment against 
post-offices, warships, or forts, but the resources of a govern- 
ment are not limited to such things. Viewed as a corporate 
representative of the people, the government renders services 
to them and receives from them payment for these services in 
the form of taxes. If a government borrows, it does so be- 



75] CREDIT 87 

cause the cost of the services performed, ostensibly for the 
benefit of the people, exceeds the compensation given by the 
people for the services — in other words, because the taxpayers 
are nominally getting more than they give. They are the 
real debtors in the case of public fiebts. They are paying the 
interest on these debts and are expected to pay the principal 
in the end. For non-payment of taxes their property is sub- 
ject to legal seizure, and since the power of government to 
impose and collect taxes can be limited only by rebellion, it is 
evident that the taxable wealth of citizens constitutes the 
security of public debts. 

75. The Value of Credit. — While credit derives its value 
from the wealth which secures it, the amount of this value is 
fixed by the terms or specification of the debt. This specifica- 
tion must needs be rendered in terms of some commodity or 
service, for debt can be extinguished only by the delivery of 
some actual wealth or service, the kind and amount of which 
is stated. This must not be misunderstood. In the course of 
business routine debts are usually paid by means of credit 
instruments, like bank notes or checks, but by such payment 
the creditor's claim is not extinguished; it is merely shifted 
from one debtor to another (95, 341). 

When debts are expressed in dollars, they are virtually 
expressed in terms of gold. This does not preclude the fact 
that some obligations have other denominations. For example, 
some farming rents are payable in agricultural products. In 
the produce exchange obligations are contracted for the de- 
livery, on certain dates, of specified quantities of cotton, 
wheat, or other products. Some instruments, like railroad 
tickets, are redeemable in services. These obligations do not 
differ in principle from money debts. The value of all credit 
instruments is defined by the terms of the promise of their 
payment, whether gold or other commodities or services be 
specified. It also follows that the market value of such credit 
is subject to the same fluctuations as that of the commodity 
or service promised. 

When prices in general rise, the purchasing power of a 
credit expressed in terms of dollars naturally falls in the same 



88 FUNDAMENTAL CONCEPTS [76 

proportion as the purchasing power of a dollar. The chances 
of a fall in value are, however, generally speaking, balanced 
by equal chances of a rise, so that on this score a creditor is 
just as likely to gain as to lose, 

76. Depreciated Credit. — While the nominal value of a 
credit equals the value of that which is promised, the market 
value is generally below this amount. There are two elements, 
namely, charge for the service of lending and the presence of 
risk, which have the effect of lowering the present value of a 
credit below its ultimate value (69, 112), Ordinarily, a credit 
has full value only at the moment it falls due, and then only 
if the promise is promptly fulfilled. 

A creditor or lender really sells, for the time of the loan, 
the right to the use of the thing or things loaned, and, as a 
matter of course, he receives a consideration in return. This 
recompense is known as "interest" if the subject of the loan 
is money, and as "hire" or "rent" if it is something else, 
such as a motor car, a farm, a house. How this recompense 
is determined in the market wUl be discussed further on 
(252-258). 

If the interest on a loan of money is paid in advance, as in 
the case of a discounted note, the debtor's promise to pay is 
limited to the amount of the principal, and the value of such 
a promise before the time of its maturity is obviously the 
face value less the interest for the unexpired term. But if, on 
the other hand, the interest remains to be paid, the promise 
really includes the interest in addition to the principal of the 
loan. Thus the total sum actually promised in the case of a 
$1000 twenty-year four per cent, bond is $1800, Although 
such a bond may at any time be above par, its value is always 
less than the amount of principal plus the interest remaining 
to be paid. Whether interest on a loan is paid in advance or 
later, the fact remains that the value of a credit at any time 
is less than the total amount yet to be paid on it. The differ- 
ence is dependent on the length of its unexpired term and 
on the current rate of interest. At a later stage of our inquiry 
(139) we shall see that interest, like hire, comprises several 
different forms of recompense. 

That reduction of the value of a debt below its ultimate 



76] CREDIT 89 

value which is due to discount at interest rate is not regarded 
as depreciation. This term is used to designate a lessening 
of value owing to risks entailed through one or more of various 
contingencies. A few of the latter may here briefly be con- 
sidered. 

So far our reasoning has proceeded on the assumption that 
if a credit is to equal the promised amount, less current dis- 
count, it must be secured by wealth fully covering this value. 
If, however, this is not the case, or if there is some possibility 
that the security, though adequate at first, may become insuffi- 
cient by the time the debt matures, the corresponding credit 
will of course be below par. 

Another factor which often affects the value of a credit 
instrument is the integrity or reputation of the debtor. If 
there is a doubt that a debt, when due, will be promptly paid, 
the credit instrument will be more or less depreciated below 
its nominal value (96). On the other hand, a reputation for 
prompt payment sustains the normal value of credit, and in 
the case of a debt based on inadequate security the belief that 
the debtor will sooner or later pay the debt may balance, at 
least in part, such depreciation as is due to a present short- 
coming of the security. 

All these and similar factors of risk exert a modifying 
effect on the fundamental proposition that the market value 
of a credit equals its face value if the security is adequate or, 
if it is not adequate, that the market value of the credit is 
determined by the value of the available security. The gen- 
eral repute of the debtor, so universally an element in the 
value of credit, is for that reason too often mistaken for the 
essential element, while in reality it is only one feature of the 
risk factor modifying the fundamental proposition. 

Before concluding this analysis of the value of credit, 
allusion should be made to a class of credits, principally 
represented by legal-tender currency, on which the debtor does 
not pay interest, but which nevertheless are universally ac- 
cepted without a deduction for discount (95), and which 
become depreciated only if the ultimate payment in full 
becomes questionable. 



CHAPTER VI 

MONEY 

77. Misconceptions Regarding Money. — The subject of 
"money" has been discussed, extensively and intensively, from 
the time of the classic philosophers down to the present day. 
It has been studied and analyzed from almost every possible 
standpoint and presented in endless variety of form. But the 
various attempts to explain the power which money has had 
since time immemorial, a power out of all proportion to its 
economic function, have only tended to involve the subject in 
irreconcilable contradictions. 

Many writers have unduly complicated the subject by in- 
troducing into its discussion matter that has no place in it. 
Instead of presenting a sharp and clear-cut definition of 
money, they have endeavored to explain, not what it is, but 
what it does, at the same time ascribing to money a number 
of functions, most of which are not in reality performed by it.^® 
The cardinal function of money is thereby confused with ex- 
traneous matter and is treated as of secondary importance, 
instead of being made the basis on which the theory of money 
really rests. 

78. Money Not a Value Denominator. — Among other 
things, money is said to be a measure or standard of value, a 
value denominator. This is in conflict with what we have 
already said on the matter. We have treated the subject of the 
value unit (28-32) without the need of referring to money. 
The fact that some money is made of gold, a metal which, 
from among other commodities, has become selected as our 
value denominator, does not justify the substitution of the 
idea "money" for the idea "gold" in the definition of the 
value unit "dollar." We cannot say that a dollar consists 
of 23.22 grains of pure money (115). If it were true that 
money is the measure of value, then gold could not also be the 
measure, as these terms are not synonymous, even though they 

"(7f. Mill, II, pp. 17-24; Perry, pp. 188-276; Walker, pp. 1-23; 
Conant, I, pp. 20-21. 

90 



79] MONEY 91 

are often used interchangeably in colloquial language. More- 
over, not all money is made of gold. Most of it consists of 
credit which can be commensurate with dollars only if its 
denomination is in terms of dollars. Confusion is inevitable 
unless we divest ourselves of the notion that money is a de- 
nominator of value. We cannot express the value of things 
in terms of "money" any more than we can express the height 
of a steeple in terms of * ' dry goods. ' ' 

79. " Dollar " Does Not Mean " Money." — The indis- 
criminate use of the term ' ' dollar, ' ' both in the sense of "value 
unit" and that of "medium of exchange," is largely respon- 
sible for this confusion. It is clear that a dollar note, which 
merely bears a promise to pay a dollar, cannot actually be a 
"dollar" (95a), although it is currently regarded as such. In 
accurate language the word "dollar" should always be con- 
fined to the meaning of "value unit." 

When speaking of "one hundred apples" we invariably 
mean one hundred individual fruits, while the phrase "one 
hundred dollars" does not refer to the number of pieces, but 
is descriptive of a sum or quantity of money worth one 
hundred units of value, it matters not whether it be a single 
one-hundred-dollar note or any number of notes and coins of 
lower denomination adding up to that amount. Moreover, 
"dollar" is often used to specify an amount of wealth figured 
at so many units of value. A man who is * ' worth ' ' many thou- 
sands of dollars may not have at his command a sum of money 
worth one hundred dollars. A given number of dollars simply 
designates the number of value units, not the number of pieces 
of money. The analogy between "dollar" on the one hand, 
and other units, such as "yard," "pound," or "gallon," on 
the other, is obvious. 

Similarly, the word "cent" designates the one-hundredth 
part of one dollar and may only at times be used incidentally 
to denote a ' * penny. ' ' A payment of ten cents may be made 
with a single dime. A manufacturer, after completing a con- 
tract for 10,000 pieces of a certain article, at the price of ten 
cents each, would probably refuse to accept payment if the 
customer were to interpret "cent" as meaning the coin and 
tender 100,000 "pennies" in payment. 



92 FUNDAMENTAL CONCEPTS [79 

The terms ''dollar," "shilling," "franc," although gener- 
ally, and for obvious reasons, used in expressing quantities of 
money, are words which must not be regarded as synonymous 
with "money" (95&). There is probably no single cause so 
prolific of error and confusion in the discussion of monetary 
matters as this failure to sharply distinguish "dollar" from 
' ' money, ' ' The relation of ' ' dollars " to " money ' ' is analogous 
to that of "yards" to "dry-goods." Just as we cannot con- 
ceive a specific quantity of dry-goods without reference to 
some yard-stick, so we cannot think of a specific sum of money 
without reference to some unit of value, such as ' ' dollar. ' ' And 
as "yard" is used for expressing the length of other things, 
like ropes or fences, so is "dollar" used to express the value 
of things other than money, like houses or services. 

Since "dollar" really means "23.22 grains of pure gold," 
a promise to pay so many dollars, if literally interpreted, is a 
promise to deliver the stated quantity of gold. Indeed, for 
the clearance of international balances only gold bullion is 
accepted. If coined gold forms part of the shipment, it is 
treated as bullion, that is, taken by weight, not by tale. For 
current commercial transactions, however, this mode of mak- 
ing payments has long been abandoned because of its incon- 
venience. To avoid the necessity of repeated assaying and 
weighing, the metals came to be coined and the weight and 
fineness of the coin guaranteed through the government's 
stamp. To such coin, hut to no other form of money, may the 
terms "money" and "dollars" be applied with equal pro- 
priety. A vague conception of this fact, coupled with a con- 
fusion of the ideas "dollar" and "money," is responsible for 
the notion, often expressed, that nothing but gold coin is 
"real" or "basic" money (88). 

That the unit of value is a conception independent of money 
can even be shown in history. MacLeod points out that — 

there are several passages in the Iliad and Odyssey which show that 
even while traffic had not advanced beyond barter, such standard of 
reference was used. We find that various things are frequently 
estimated as being worth so many oxen." 

" MacLeod, I, p. 170. 



80, 81] MONEY 93 

But we need not go back as far as the time of Homer. In 
the earlier decades of the nineteenth century, when in the 
several states of Germany different units of value were in use, 
the "Mark fein" was employed in interstate commerce as a 
unit of account. The "Mark" was at the time the currently 
adopted unit of weight for silver (about half a pound), and 
the coins in actual use were appraised by the weight of pure 
silver they contained (98). 

8o. Money Not a Store of Value. — It is also claimed that 
money is a means of saving or storing wealth. This is not 
literally true. The man who hoards gold coin does really 
store away wealth in the shape of gold metal, but the man who 
hoards bank notes does not thereby store any form of material 
wealth, for the notes are only bearers of a right to a certain 
amount of wealth which is actually in possession of others 
(282). 

8i. Money Not a Standard of Deferred Payment. — The 
assertion that money is a standard of deferred payment, unless 
intended merely to emphasize the notion that it is a standard 
of value, is not only groundless, but actually devoid of mean- 
ing. 

The phrase can have reference only to promises, either to 
perform some service, or to deliver something, at some future 
time. But in every contract the service to be performed, or 
the thing to be delivered, at some future time, is always 
specifically described and is by no means always money. When 
a farmer borrows a bushel of oats from a neighbor, promising 
to return another bushel a month hence, the standard of de- 
ferred payment is oats. Whatever a contract specifies is the 
standard, and in contracts which promise the payment of a 
number of dollars, it is the commodity gold, not money, which 
is the standard of deferred payment. Moreover, anything 
which is promised to be delivered in the future being a stand- 
ard of deferred payment in that case, it follows that gold is 
the standard only where it is specifically or by implication 
promised to be delivered. The property of being a standard of 
deferred payment cannot therefore be regarded as being in- 
herent in money. 



94 FUNDAMENTAL CONCEPTS [82. 83 

82. Importance of Sharp Definitions. — These criticisms 
may look like hair-splitting. But, as a matter of fact, correct 
reasoning is impossible unless the words which convey the 
thought are carefully and sharply defined and used only in 
the sense of their definitions. The notion that money is a 
measure of value has led to more than one untenable con- 
clusion. Money need not be produced to provide a value unit ; 
gold has been adopted for this purpose. Nor need money be 
manufactured to enable men to defer the delivery of a specified 
amount of wealth, or to accumulate wealth. The latter is 
done by producing more wealth than is consumed, when accu- 
mulation follows as a matter of course. For none of these 
ends was it necessary to invent or to manufacture money. The 
only incentive to its production and emission has been the 
desire to overcome the difficulties experienced in the processes 
of simple barter (88). 

83. The Function of Money. — Simple barter was neces- 
sarily the original mode of exchanging things. But although 
adapted to compass the limited traffic of primitive peoples, 
barter would be utterly inadequate for the commerce of a 
more complex society. 

Simple barter depends on two distinct coincidences. To 
begin with, the intending barterers must each have something 
which the other desires, and, furthermore, the desired things, 
in order to be exchanged, must be of equal value. The first 
of these coincidences particularly occurs so rarely that the 
extensive commerce which goes hand in hand with the speciali- 
zation of industry would be wholly impossible if we had to 
depend merely on simple barter. 

The use of money obviates these difficulties. The man who 
has something to exchange need only find a person desiring 
to obtain it. He will receive in exchange money for which he 
can in turn obtain such things as he desires from those who 
may offer them for sale. Thus A may sell a basket to B, and, 
being paid for the same in money, may use it in buying a hat 
from C. He thereby really obtains a hat for his basket. 
But he delivers the basket to one person and receives the hat 



84. 85] MONEY 95 

from another. In short, he need not hunt for a hatter who is 
in need of a basket. In this way the shortcomings of simple 
or direct barter are completely met by the process of complex 
or indirect barter (52, 259), a process involving the use of a 
medium of exchange, money. The use of money enables him 
to deal with the community at large as a second party ; through 
its mediation he delivers to one member of the community the 
goods he supplies and receives from another member the goods 
he demands. 

This clearly illustrates the true function of money to be 
that of a medium of exchange. For no other purpose would 
it have teen necessary to produce money. We should there- 
fore define *' money" as any medium, of exchange adapted or 
designed to meet the inadequacy of the method of exchanging 
things hy simple barter. Anything that accomplishes this 
object is "money" (88). 

84. The Distinctive Feature of Money. — Our aim should 
now be to obtain a clear understanding of what it is that dis- 
tinguishes money from all other valuable things, namely, its 
specific quality. At first glance it would appear that this prob- 
lem is not a difficult one. Cannot everybody tell money from 
other things? Yet the particular quality which is possessed 
by money exclusively and which imparts to it its specific power 
is rarely, if ever, given a thought. What is that particular 
quality ? 

This question is not answered by the statement that money 
is a medium of exchange, for this is not the whole story. We 
are now trying to find what it is that imparts to money the 
power to serve as a medium of exchange. If a book is sold 
for a dollar, there is no question but that each of the two things 
is given in exchange for the other. The dollar buys the book ; 
the book buys the dollar. Why should the one, but not the 
other, be considered a medium of exchange ? 

85. Money a Product of Social Compact. — The one 
quality which is peculiar to money alone is its general accept- 
ability in the market and in the discharge of debts. How 
does money acquire this specific quality ? It is manifestly due 



96 FUNDAMENTAL CONCEPTS [86. 87 

solely to a consensus of the members of the community to accept 
certain valuable things, such as coin and certain forms of 
credit, as mediums of exchange (285, 298). In the course of 
time this consensus developed into a prevailing tacit agree- 
ment which, in the case of legal-tender currency, has found 
expression in a statutory compact (93, 99). This prevailing 
agreement is that through which gold and certain forms of 
credit are given the quality of money. It is merely con- 
ventional with regard to bank notes and bank checks, and 
also in international commerce, where bullion is the accepted 
means for adjusting balances of trade. When serving this 
office, gold is just as truly merchandise as it is money (315). 
The relationship between money and merchandise is there 
exhibited in its true light. 

86. Monetary Laws. — When monetary laws were first 
made, they merely formulated the already existing conventional 
usage of accepting certain commodities or certain forms of 
credit as money. Such laws can of course have sway only 
within the jurisdiction of the respective authorities, unless by 
special treaty, as in the ease of the Latin Union, some of the 
legal money of one country is made also legal in another. 

Monetary laws may be divided into two categories. They 
may be mandatory or permissive. The first class comprises 
the legal-tender laws which prescribe those forms of currency 
which must be accepted as money (95), while the second class 
embraces laws which permit and promote the issue of currency 
which may be accepted as money by those who are willing to 
do so and which, accordingly, circulates by virtue of a custom 
amounting to a tacit agreement or consent. Legal-tender cur- 
rency cannot be refused by a creditor on the plea that he wants 
gold, while all other forms of currency may be refused and 
lawful money demanded. In current business transactions this 
distinction is rarely observed. Both bank notes and checks 
are usually accepted in payment without hesitation. 

87. The Right Conveyed by Money. — The agreement in 
question, whether it be of a tacit nature or expressed by law, is 
really an agreement of all who have anything to sell to place 
their merchandise at the disposal of the bearers of money (93, 



88] MONEY 97 

287). These latter can select anything in the market and 
obtain exclusive possession upon ,the delivery of an equivalent 
amount of money. The merchant concedes in effect that 
money conveys a right to an equivalent amount of the mer- 
chandise he offers for sale. It is true this right cannot be 
enforced by law, but inasmuch as products obtained through 
specialized effort cannot be distributed among consumers ex- 
cept through processes of complex barter, it follows that ac- 
ceptance of the means of that complex barter, namely, money, 
in exchange for goods is a matter of necessity. The right 
conveyed by money is enforced by a power superior to man- 
made law — ^by the law of self-interest. 

Our conclusion on this matter may now be briefly sum- 
marized. By virtue of the general consensus which gives it 
general acceptability, money conveys an option to any goods 
exposed for sale, to the extent of the value of the money. This 
command over the market is not possessed by any other form 
of wealth. 

88. The Term " Money " in its Broadest Sense.— In an 
exhaustive examination of our present subject we must regard 
as money all devices used for mediating exchanges. Con- 
sidered from a purely economic standpoint, the term "money" 
should include everything that performs the mission of money, 
no matter whether its domain is of international scope or is 
limited to national or even to lesser fields. It is true this 
view is not shared by the majority of authorities on money, 
some of whom confine the term strictly to standard coin, others 
include legal-tender notes, still others bank notes as well, and 
some writers, particularly among the more advanced school, 
recognize that bank credit should also be embraced in the 
term "money." The excluded forms are sometimes termed 
"money substitutes" (95, 293). There is, however, neither 
sound economic reason nor any logical necessity for making 
this distinction (69). Insistence upon it no doubt results from 
a failure sharply to distinguish the meanings of the two terms, 
"dollar" and "money" (79, 115). The evolution of money 
has come about through the need of expanding simple into 
complex barter. The business world needs money for the pur- 
7 



98 FUNDAMENTAL CONCEPTS [89 

pose of exchange, and absolutely for no other purpose (82) . It 
is indispensable to the business man for the purpose of buying 
and selling things and services, and of clearing accounts pay- 
able by returns from accounts receivable. Why, then, should 
only some devices performing this mission be called "money" 
and not all? The merchant does not care whether he is paid 
with gold coin, with notes, or with valid checks. While in a 
civil suit the court is by law obligated to recognize only lawful 
currency, the student of economics is under no such restraint, 
as the sphere of his research is not limited by legal definitions 
or by geographical boundaries. 

In conformity with our definition (83) we shall apply the 
term "money," particularly when used in the comprehensive 
sense of the right conveyed by it, broadly to all means for 
mediating exchanges. But when adverting to money systems 
controlled by legal authority, we shall use the term ' ' currency, ' ' 
especially if the reference is directed or confined to money 
tokens. In this light, "money" is related to "currency" as 
"credit" is related to "credit instrimient." 

89. The Theory of Money. — In whatever form money may 
exist, its object is to permit indirect or complex barter. In- 
stead of exchanging goods for goods, the goods are first ex- 
changed for money and then the money for other goods. A 
member of the community who delivers wealth or renders any 
other form of service to another member may thereby be com- 
pensated by wealth or service received from a third member. 
But in this process time elapses between the giving and the 
receiving, and during the interval the giver of the service is 
in possession of money, an instrument attesting that he has 
given wealth or rendered service to the community and is 
entitled to the return of an equivalent. During that interval 
the holder of money is evidently a creditor of the community 
(115, 210, 211, 259). Money is not accepted for the purpose 
of eating, wearing, or otherwise consuming it. In its essence 
money is credit acquired through rendering a service to the 
community, a credit constituting a right to receive from the 
community an equivalent in kind. A piece of money — a money 



90] MONEY 99 

token — ^merely certifies that the holder is entitled to a return 
for a service rendered by him to the community. 

Strictly speaking, this is true only when the money has 
been obtained in pajrment for goods or services. Possession of 
money can be attained in other ways. Thus the statement does 
not apply to banks when they issue currency which they get, 
not in return for wealth delivered, but only in return for 
security deposited, as in the case of United States national 
banks. They do not part with ownership of the security which 
they deposit, but only with its possession. Nor is it applicable 
to banks receiving money on deposit, nor to borrowers of 
money who obtain it in exchange for mere promises to return 
an equivalent sum at a future time, for no form of wealth is 
given in return in either case. Moreover, money may be ob- 
tained by bequest, by gift or by dishonest means, in any of 
which cases the money passes into the holder's possession with- 
out any goods or other form of service passing in return. 

90. Money Analogous to Book Accounts. — The theory of 
money, then, is closely parallel to the theory of credit and 
should be considered accordingly. If there were no money, 
any system of crediting sellers and debiting buyers would be 
fully competent to accomplish the work now performed by 
money (203). It would be inmiaterial whether these credits 
are recorded in books or conveyed by credit tokens. The car- 
dinal condition, of course, is that these credits, whatever their 
form, shall be accepted at their value in exchange by those 
who have things or services to sell and that they shall be trans- 
ferable from those who buy to those who sell. 

Suppose that instead of issuing money we should institute 
a system of ' * accounting, ' ' by recording all commercial trans- 
actions, crediting the sellers and debiting the buyers with 
the value of the goods or services transferred. If it were 
agreed upon that every credit so recorded shall entitle the 
creditor to obtain in exchange for it any equivalent mer- 
chandise offered for sale, such credit would serve all the pur- 
poses of money. The possessor of a recorded credit could thus 
utilize it to the extent to which the credit entitled him. 

This is virtually the method on which the bank-check 



100 FUNDAMENTAL CONCEPTS [91, 92 

system is based, a check being an order by the buyer or debtor 
to transfer, on the books of the bank, a specified amount of 
his credit to the seller or creditor. 

The application of this system to all transactions, even the 
smallest, would be inconvenient and costly. But we know that 
credit can be transferred by methods other than book entries, 
namely, by means of credit tokens. Our currency system is 
of this nature. Currency consists of tokens which are passed 
from hand to hand in the process of transferring credit from 
the buyer to the seller. 

Although the currency and the accounting systems are 
different in form, they are identical in principle, hence any 
theory which applies to either system must apply equally to 
the other. While the currency system is the preferable one 
for minor transactions generally, the accounting system, on 
the contrary, is the most convenient method for mediating 
exchanges on a larger scale, and, since this is the simplest in 
conception, it will here be made the basis of our further study. 

gi. Creditors and Debtors of the Money System. — The 
reader may have observed that in discussing the accounting 
system we dealt only with credits acquired by selling things 
or services. So far the case is parallel with existing conditions 
in the use of money, the money being a credit for services 
rendered. In general, men can buy only when they have 
acquired money, presumably by selling goods or services. But 
there is another side to be considered. Where there are 
creditors, there must, of course, be debtors. In correct book- 
keeping the ledger must always balance. The sum of all 
credits must be equal to the sum of all debts. So far, in dis- 
cussing the accounting system, we have considered only ered- 
kors. But where are the debtors? If, as a rule, men must 
sell goods or services before they can huy any, there must be 
some who can huy goods or services before they need sell any. 
Who are they? 

92. The Issuer of Currency is Debtor. — The same ques- 
tion, when applied to the currency instead of the accounting 
system, assumes this form. Who are those who obtain goods 
or services in exchange for money before they have acquired 



921 MONEY 101 

money in exchange for goods or services? The answer is ob- 
vious. They are those who issue the money and put it into 
circulation. The issuers are manifestly the debtors in the 
case (105, 115, 210, 259). In point of fact, money, in its 
very essence, is an acknowledgment of debt (123). 

It is plain enough that the right to become debtor to the 
money system by the issue of money tokens cannot be left to 
any and everybody unconditionally. To protect and secure 
the credit involved, the debtor must be held rigidly to account. 
Issuers must accordingly be required to furnish security that 
is practically free from risk, and, moreover, the community 
must be assured that such security has been furnished. The 
wealth on which this security is founded is the substance which 
gives value to the money and which, with one or two ex- 
ceptions that shall be discussed presently, remains in posses- 
sion of the issuer. The right to control the issue of currency 
has for good reason become a prerogative of government, to 
which the public looks for assurance of the soundness of the 
currency (300). 

When the government itself becomes the issuer, it is the 
rule that an amount of gold metal covering a fraction of the 
face value of the issue is kept on hand for purposes of re- 
demption, while the bulk of the issue is secured by the credit 
of the government. As regards such currency, the people are 
creditors as holders and users of this money and debtors as 
members of the body politic. 

According to the nature of the security given and other 
conditions of the issue, currency may be divided into four 
principal classes, namely, standard money, legal- tender notes, 
subsidiary coin and notes and other credit instruments that 
are not legal-tender. Each class may embrace several systems, 
and each system has its peculiar features, its own creditors 
and debtors. In each of these various systems the issuers are 
debtors to the amount of the respective issue. 

Before we proceed to examine the several systems of cur- 
rency, it may be in order to warn the reader against the 
erroneous impression which the term "paper money" is apt 
to make. Not money, but only money tokens, can be made 



102 FUNDAMENTAL CONCEPTS [9S 

of paper. The paper serves only as the vehicle of a promise 
and thus becomes an evidence of debt. Not the paper, but 
the wealth by which the debt is secured, is the real substance 
of the so-called paper money. The term "credit money" is 
more descriptive and is less liable to mislead. 

93. Standard Money. — Where the coinage of gold is free, 
any owner of gold may take it to the mint and have it coined. 
By this process a part of his wealth is converted into money. 
When he subsequently exchanges the coin for goods in the 
market, he becomes the issuer of this currency, namely, the 
one who can and does iuy with currency before he must sell 
to get currency. 

In viewing the book-entry credits of our illustration as 
an analogue of coin currency, we must consider coin as a 
credit instrument, that is, an instrument conveying a claim to 
wealth which is in possession of others (260). This is not 
the view usually taken, but it is the only one from which a 
clear insight into the subject can be gained, and from which a 
rational study of the problem involved can proceed. A gold 
coin differs from a mere disk of gold not only in that its weight 
and fineness are officially vouched for by the stamp, but in 
that — and here is the essential difference — the coin obtains 
through the common consent, expressed in the law of legal- 
tender, a command in the market (85) which the disk in the 
absence of the prevailing consent would not have, even in 
the face of the most reliable guarantee of full weight and 
fineness. The coin invests its bearer with a right to claim, or 
a power to obtain, in exchange for it any equivalent mer- 
chandise exposed for sale, a right which a piece of gold not 
recognized as money does not convey. 

In the ordinary channels of trade, as distinguished from 
those of banking, gold bullion is not money, but mere mer- 
chandise. Merchants do not currently take it in exchange for 
their wares, since there is no agreement to accept it as cur- 
rency. But when put in the conventional form of coin, it 
falls within the agreement through which the gold conveys to 
the holder an option to become owner of any equivalent mer- 



93] MONEY 103 

chandise exposed for sale (87). Those who accept gold coin 
in trade have not merely the hope of finding some one willing 
to accept the piece of gold in trade ; they have the assurance 
that every one who has merchandise to sell will deliver it in 
exchange for the coin. The command in the market thus con- 
veyed by the coin is the one typical feature of money. The 
receiver of coin has no special desire for the metal contained 
in it, except in so far as it affords assurance that the token 
actually conveys the value which it designates. As a direct 
desideratum, as an article of merchandise, the metal of the 
coin affords an alternative in being a commodity that may be 
used or sold. The function of the gold in the coin is that of a 
pledge given by the issuer to assure the payment of the debt 
that was contracted when the coin was first put into circulation, 
and which payment is made only when the gold is ultimately 
put to use as metal. It would be incorrect to assume that the 
owner of the gold, after having it coined and passed as money, 
has thereby found a purchaser for his gold (114, 259). The 
merchant who accepts the coin in payment is no more a pur- 
chaser of this gold than the banker is the purchaser of bonds 
which a customer offers as collateral for a loan. He does not 
want the metal for any other reason than the banker wants 
the security ; he wants a medium of exchange, an instrument 
conveying an option to any equivalent merchandise which he 
wants to obtain. Only after this coin is put into a goldsmith's 
crucible can the gold assume its normal function as a com- 
modity, and only then will it have found a purchaser.^^ 

If we could follow the journey of a coin from the time 
of its coinage until it is melted down, we would find that the 
issuer, when using the coin for the first time, obtains goods or 
services, and thereby incurs a debt, for the payment of which 
he gives the gold as collateral security. Everyone through 
whose hands the coin subsequently passes first gives and then 

" Objection might be made to this argument where the melting of 
coin for its metal is forbidden. But such a regulation cannot, in the 
nature of things, be enforced. Indeed, if it could not possibly be 
evaded, coined metal would be deprived of its value, as its utility would 
become unavailable. 



104 FUNDAMENTAL CONCEPTS [94 

receives goods. Only the final owner who melts the coin down, 
or otherwise uses the metal as such, after giving goods or 
services, accepts the gold as a merchandise. Thus the last 
recipient really buys the gold from the first issuer, the col- 
lateral having been applied to finally cancel the debt. 

94. Holder of Standard Money Both Creditor and Debtor. 
— The conditions arising from issuing standard coin are, in 
some respects, peculiar. The security being identical with the 
denomination of the debt, there is no danger of a fluctuation 
of its price, and a margin to cover risk is unnecessary (286). 
The issuer will therefore not insist on an ultimate return of 
the security, namely, the gold, but will leave it optional with 
the temporary creditor, the holder of the token, to use the 
pledge for cancelling the debt if he so chooses. Thus the 
identity of the issuer, namely, the individual who brought the 
gold to the mint for coinage and first put the coin into circu- 
lation, is lost, and the bearer of the coin becomes himself the 
custodian of the security, the gold. In a sense he is an agent 
of the issuer. 

In the United States there are two ways of dealing with 
the pledge. The gold may either be permanently embodied 
in the token itself, by making this of gold corresponding in 
weight with the denomination ; or the metal may be deposited 
in the national treasury, there to be held in trust for the 
bearer of the tokens which are issued in the form of gold 
certificates. These two forms of currency are virtually iden- 
tical. The only difference is that in the case of coin the pledge 
is in possession of the bearer of the token, while in the case 
of certificates it is in custody of the government. In the latter 
case the government, in its capacity as trustee of the security, 
represents the debtor, while the bearer of the certificate is the 
creditor. In the case of coin, each successive bearer is both 
debtor and creditor, debtor as the temporary holder or trustee 
of the pledge, and creditor as a claimant to merchandise. It 
should be noted that his credit and his debt, although equal in 
value, are not identical in character. His credit represents a 
right to merchandise, while his debt consists in his obligation 
to deliver the gold when his right to merchandise is made good. 

This aspect of the subject is the only one which presents 



95] MONEY 105 

to the student a perspicuous view of the salient features of 
money. It shows in its true light the function which the gold 
in the coin performs. It brings out clearly the principle which 
distinguishes the coin from a mere lump of gold, and points 
out that the government stamp on the coin imparts to it, not 
value, but only general accepidhility. 

The value of such money is manifestly determined by the 
amount of the gold which is actually contained in the token if 
the token is a gold coin, or which can be obtained on demand 
if it be a gold certificate. 

95. Legal-tender Notes. — For the purpose of enforcing 
their acceptance in payment of debt, certain notes are by law 
declared to be "legal tender." These notes are thereby made 
legal tender for paying debt, so that a creditor cannot demand 
some other money when they are offered (86, 99). In the 
United States only specie and certain issues of notes bearing 
the government 's promise to pay dollars are made legal tender. 

While legal-tender notes are "money," they are not "dol- 
lars." It is clear that a "promise to pay a dollar" cannot 
itself be a "dollar" (79a). In the strict meaning of the term, 
a dollar is so and so much gold, hence a promise to pay so and 
so many dollars, if taken literally, can be discharged only by 
the delivery of the specified amount of gold. But in the 
ordinary course of business payment can lawfully be made 
by means of legal-tender notes instead of gold. These notes 
therefore perform the same function in discharging debt as 
gold would. They are actually money, not merely money sub- 
stitutes (88), as they are often designated; but they are sub- 
stitutes for dollars, that is to say, for gold (69). The very 
law which makes these promises to pay dollars the legal equiva- 
lent of dollars has given rise to that perversion of language 
that allows the term dollars to signify money (79&, 115). 
Thus, in place of "a sum of money worth one hundred dol- 
lars ' ' we simply say * ' one hundred dollars. ' ' Colloquially this 
inexact expression is acceptable, as it shortens language. It 
is only when taken in its literal sense that the phrase becomes 
misleading, and even then only when false conclusions are 
derived from its misconstrued meaning. 



106 FUNDAMENTAL CONCEPTS [96 

In the United States the federal government alone issues 
legal-tender currency, constituting a non-interest-bearing pub- 
lic debt which, although paying no interest, yet circulates at 
an undiscounted value equalling the full value of the gold in 
which it is redeemable (76). 

When legal-tender notes are applied to the payment of a 
debt, the creditor is paid only in a legal, but not in an 
economic sense, for the notes are themselves only promises to 
pay. Initially the creditor has a claim against a particular 
debtor, but after he is paid in money he has in its place a 
claim against the community (75, 341) which everyone who 
has anything to sell is ready to honor with goods or services. 
By the payment of money the right of the creditor is not 
made good, but merely broadened, so as to apply to anything 
in the market he may choose (102). His claim is finally satis- 
fied only when he receives actual produce of labor. 

96. Depreciated Currency. — When adequate provision is 
made for redeeming the promise to pay dollars, legal-tender 
notes will naturally be accepted at par with gold. But govern- 
ments have not always been able to redeem, or have failed 
to provide for redemption, and at such times have actually 
legalized refusal of redemption. In this country, prior to 
the year 1879, the national issue known as the "greenbacks," 
nominally promises to pay dollars to bearer on demand, were 
neither redeemable in specie nor even accepted by the govern- 
ment itself as the equivalent of coin. If a business man issues 
a promissory note, he is legally obligated to accept it at par 
on or after its maturity in payment of any debt due him, but 
governments issuing currency presume to be independent of 
the rules of common justice, on the old plea that "a sovereign 
can do no wrong. ' ' 

However, although the greenbacks were not honored by the 
government, the people in general acted on the expectation 
that, at some future time, the notes would be redeemed, either 
in silver or in gold.^^ This expectation of future redemption 

" The United States was on a bimetallic basis at the time these 
notes were issued. 



96] MONEY 107 

gave them a standing, but because of the comparative uncer- 
tainty, as well as the delay of redemption, their current value 
was below their nominal value (76), a condition which mani- 
fested itself in the market by the rise of gold and silver to a 
premium (109, 112, 322). The circulation of depreciated cur- 
rency in other countries is to be similarly accounted for. In 
the event of all expectation of ultimate redemption vanishing, 
as was the case with the Confederate notes, the value of the 
notes naturally falls to naught. 

When dollars of gold or silver did rise to a premium over 
the dollar of currency, this did not indicate that either gold 
or silver had risen in value, but that the currency had fallen 
below parity with the value of its promise. Instead of saying 
that gold or silver was above par, it should really have been 
said that the dollar of currency was below par. This miscon- 
ception arose from the fact that the currently accepted unit 
was a unit of lowered value, entailing a general rise of the 
price level, including, of course, a coincident rise in the price 
— not in the value — of gold and silver. 

Currency notes which, however depreciated, remain in cir- 
culation, are not, in the full sense of the term, "irredeemable" 
or "inconvertible" notes, as they are so generally termed. If 
there were not a prospect of their being redeemed at some 
future time, they would have no value and would go out of 
circulation completely. The above terms, as applied to notes 
in circulation, must therefore be understood as implying only 
a suspension of payment and not a final repudiation. 

Depreciation is not an invariable consequence of suspension 
of specie payment, particularly if the issuing authority accepts 
the notes at par with specie. "Where the government is the 
issuer, acceptance of the notes in payment of taxes at par with 
standard coin (100, 114) is a means of maintaining their value. 

It would be a mistake to say that such notes are irredeem- 
able. A familiar analogue of such notes is met with in store 
orders, the issuer of which, while not promising to redeem 
them in so many dollars, agrees to redeem them in mer- 
chandise. They are manifestly credit instruments, redeem- 
able indeed, but only in things other than dollars. Such 



108 FUNDAMENTAL CONCEPTS {97 

orders, issued by individual storekeepers or by large employers 
of labor, have circulated within limited fields as currency 
(106). If money tokens are issued by the government and 
accepted in payment of taxes, but not otherwise redeemable, 
they are clearly of the same nature as store orders, for they 
are accepted by the issuing government in payment for services 
rendered by the government to the taxpayer and can therefore 
circulate at par with specie. 

Nevertheless, such money is not altogether secure against 
depreciation. It is manifest that store orders can have value 
only if the issuer has something for sale which the holders of 
the orders want to buy, and that without this condition the 
orders are practically worthless, no matter how much other 
wealth the issuer may possess. Moreover, if the goods offered 
by the issuer of the orders are held at exorbitant prices, such 
orders can be made instruments of extortion. The value of 
store orders is therefore of an essentially precarious nature, 
and their use as currency has been forbidden. 

Legal-tender notes bearing no effective promise besides that 
of acceptance in payment of taxes have the same defect. If 
they are issued in such volume as would overreach the credit 
of the government, they would depreciate. It cannot, how- 
ever, be determined just at what point the strain on the public 
credit would have effect. Money of this kind always possesses 
an element of uncertainty or indefiniteness, inasmuch as re- 
demption may be evaded by various technicalities. The issue 
of any currency not directly redeemable in the standard com- 
modity is therefore inexpedient. 

97. Fiat Money. — Money tokens bearing no other promise 
than that of acceptance at face value in payment of taxes 
cannot have any value unless the unit of that * ' face value ' ' is 
related, directly or indirectly, to some standard commodity. 
Such relation exists if at the same time money which is related 
to a standard commodity is in general circulation and estab- 
lishes the accepted unit of value. By being accepted at par 
with this other money, those tokens are brought into corre- 
spondence with the current measure of value. Otherwise "ac- 



98] MONEY 109 

ceptance at par" would have no significance (322a), as there 
would be nothing with which those notes would be at par. 

The fact that currency has continued to circulate in the 
market during periods of suspension of specie payment is the 
source of a widely prevalent belief that the value of currency 
is created by the ''fiat" of government (322&) through the act 
of declaring it legal tender, thus supplying a medium of ex- 
change for which there was a certain demand. But this view 
cannot be sustained. The issuer, in emitting these notes, ob- 
tains in exchange for them valuable things or services. By 
the believers in fiat money the value so obtained is considered 
to be a legitimate income of the government, termed "seignor- 
age" (113-114), while in reality it should be regarded as 
virtually a loan of which the notes are acknowledgments. 

History records a number of instances of notes issued under 
this erroneous impression. Prominent among them are the 
Continental currency of the American Revolution, and the 
French assignats and mandats. They circulated for a time 
under the force of economic momentum, but their worthless- 
ness was sooner or later recognized. This worthlessness was 
not due to an over-issue, as some economists would have us 
believe, but to the fact that no provision had been made for 
their redemption. 

98. History o£ Legal-tender Laws. — Originally, gold and 
silver, when figuring in exchanges, passed by weight (79). 
For the purpose of saving the time and trouble of the repeated 
weighing, coins of these metals were made of certain weights, 
and by an official stamp their weight and fineness was certified. 
These coins retained the names of their respective weights, and 
a pound of silver coins thus certified was known as a pound 
of money. It was in this way that the denominations drachme, 
pound, peso, livre, lire, etc., originated. 

The exclusive right to coin money was assumed by the 
state and so became the prerogative of the sovereign. In 
course of time some rulers made this prerogative of coinage a 
source of income. Having borrowed money and finding them- 
selves in straits when the time came for paying the debt, they 
made coins lighter, or of baser composition, than before, but 



110 FUNDAMENTAL CONCEPTS [99 

continued to apply the term "pound" to the same number of 
pieces which before the debasement made up a pound of silver 
(114a). The difference between the nominal and the actual 
weight afforded an income which was termed "seignorage" 
(113), the light-weight coin being applied to the payment of 
the debt contracted when the coin was heavier. By repeatedly 
employing this process, the coins were ultimately made so light 
that the "pound of money" contained only a small fraction 
of a pound of silver. This process was carried much further 
in France and Italy than in England.^" 

Laws declaring such light-weight coin legal tender for full 
weight were, of course, necessary to consummate the fraud. 
Otherwise there would have been no need for legal-tender 
laws. Thus the law creating legal-tender money was con- 
ceived by dishonest sovereigns who used it for defrauding their 
creditors. Similar misuse of the prerogative of the sovereign 
power, though not so vicious, has been made whenever the 
circulation of a depreciated currency has been enforced by 
legal-tender enactments. 

As a matter of course, all reductions of the weight as well 
as other forms of debasement of the coin were promptly fol- 
lowed by a corresponding fall in the purchasing power of the 
legal value unit (114&). The terms, pound, lire, livre, peso, 
lost their original meaning and have since been used to denote 
the arbitrary unit resulting through the repeated reductions 
from the original weight of the precious metal in the coin. 

After the names of the various units had lost their literal 
meaning, and especially after gold took the place of silver as 
a standard of value, laws were, of course, necessary to state 
precisely what amount of silver or gold should constitute the 
unit. 

99. Legal-tender Quality Not Essential to Money. — 
When notes are in fact redeemable in dollars, there is no 
need for legal enforcement of their acceptance. The general 
and unreserved acceptance of national bank notes and of 
checks in transactions in which formerly only legal tender was 

'» Cf. MacLeod, I, p. 273 ; Conant, I, p. 138 ; et al. 



100] MONEY 111 

accepted, plainly shows that there is no discrimination in 
praetiee between valid legal-tender notes and other valid 
means of payment, and that legal-tender laws are entirely 
superfluous for the purpose of giving currency to any sound 
medium of exchange. 

But while legal-tender enactments are not necessary to 
give acceptability to notes which are known to be redeemable, 
yet there are some reasons which make such laws desirable. 
They give expression to the social compact through which 
wealth is turned into money (85), and, moreover, they pre- 
scribe what is to be regarded as money in an action at law 
(95, 306). 

100. Subsidiary Coin. — In subsidiary coin the nominal and 
current value generally exceeds the value of the metal of 
which the coin is made. This excess of value is attributed 
by some to the "fiat" of government. Others aver that the 
limited supply in conjunction with the demand for the coin 
is that which keeps this money at par. But neither of these 
assumptions affords the correct explanation. The continued 
circulation of subsidiary coin, notwithstanding the inferior 
value of the metal contained in it, is simply due to the fact 
that this coin is either redeemable in legal money of larger 
denomination, or, if not so redeemable, is accepted at par in 
payment of dues to the issuer, that is to say, of taxes (96). In 
either case, subsidiary coin represents an indebtedness of the 
issuer to the holder. 

There is no inherent reason why subsidiary coin should be 
made of such costly metal as silver. When silver was the 
value denominator and the small coins contained their pro- 
portionate share of the metal, there may have been some reason 
for making fractional coin of silver, since it could then be 
classed with standard coin not depending for its value on 
redemption. But now, since the denominator is gold, there is 
no reason for continuing this practice. Conservatism alone 
can account for the persistence of a custom that has long 
since outlived its usefulness. If the value of the metal of 
which these tokens are made should fall, the issuer must bear 



112 FUNDAMENTAL CONCEPTS [loi 

the loss, just as he would gain in the event of a rise of this 
value. The fall in the value of silver has, indeed, burdened 
this government with an indebtedness far exceeding the so- 
called seignorage derived from the issue of under-valued coin. 
Being redeemable in gold and also accepted at par in payment 
of taxes, the tokens would circulate in the commercial world 
at par even if made of aluminum or of some other cheap 
metal or of paper. 

Viewed from an economic standpoint, the silver dollar of 
to-day should evidently be classed along with subsidiary coin, 
for the current and nominal value exceeds the value of the 
metal of which it is made. These coins really represent a 
public debt, partly secured by the silver they contain and 
partly by the credit of the government. If they are to be 
retired, it must be by the government. 

The silver certificates, based on silver dollars actually de- 
posited and held in the federal treasury, bear the same re- 
lation to these coins as gold certificates bear to the gold 
deposited in the same treasury. The silver certificates illus- 
trate a case of superposed credit (73), for they convey to the 
holder a right only to other credit instruments, namely, to 
silver dollars. 

loi. Bank-note Currency. — Under this head are comprised 
all non-legal-tender bank notes issued under provision of law. 
In the United States the ''national bank notes," issued 
through national banks, are the only notes of this type now 
in circulation. They bear promises of the respective banks of 
issue to pay to bearer so and so many dollars on demand. 
Under present laws these notes are printed by the govern- 
ment at the cost of the banks, and their issue is contingent 
on a number of conditions of which the principal ones are: 
(1) that federal bonds be deposited as security in the federal 
treasury, (2) that a certain tax be paid, (3) that each bank 
redeem its notes in lawful money on demand, and (4) that a 
redemption fund of five per cent of the issue be maintained 
in the federal treasury. There are several additional con- 
ditions of minor importance which need not here be 
enumerated. 



102] MONEY 113 

Nominally, bank notes are redeemable in "dollars," that 
is, in a definite quantity of gold, but since the law places legal- 
tender notes on an equality with gold coin, the banks are 
free to tender such notes in redemption of their own. Being 
redeemable in gold or in notes which are redeemable in gold, 
the value of bank notes is on a par with gold. 

102. The Real Issuers of Bank Currency. — The banks 
through which these notes go into circulation would appear, 
at first sight, to be the issuers of these notes. But, in reality, 
they are only agents in the process of issue. The actual issuer 
of a note is any one who in the process of issue becomes debtor 
of the money system, in other words, the possessor of wealth 
on which the value of the credit money rests. To realize this 
fact we need only follow the successive steps by which national 
bank notes are put into circulation. The government prints 
the notes and delivers them to the bank of issue upon deposit 
of the required security. Then some customer of this bank, 
say, a manufacturer who is in need of money, borrows from 
the bank ^^ on deposit of some credit token — say a promissory 
note, perhaps supplemented by additional security, be it col- 
lateral or endorsement — and is given "credit" on the books 
of the bank. Upon drawing on that credit for cash, he re- 
ceives a corresponding amount of the bank notes. Up to this 
point the notes have not been used as money, the transactions 
having been only exchanges of credit for credit. But now the 
manufacturer uses the bank notes, say, for buying supplies, or 
perhaps for paying wages. This is the firsi exchange of the 
notes for real products. Only this last transaction, the giving 
of the notes for goods, results in a condition where ownership 
and possession of actual wealth are separated (68). The 
manufacturer has parted with the money and has the goods ; 
he possesses more wealth than he owns. The former owners of 
the goods have given up possession of them and obtained 
money in exchange; they now possess less wealth than they 
own. Their right to the goods they had for sale has been 

"For simplifying the argument, a bank's customer having some 
commercial paper discounted is here considered a borrower giving the 
note as collateral. 
8 



114 FUNDAMENTAL CONCEPTS [102 

converted into a right to goods for sale by others (95). The 
manufacturer is debtor ; the holders of the money are creditors. 
Nominally the manufacturer is debtor to the bank, but the 
bank, in turn, is debtor to the bearers of its notes. The bank is 
manifestly a neutral factor in the chain by which, in the 
ultimate analysis, the manufacturer is indebted to those who 
hold the notes; not, however, particularly to those whom he 
paid with the notes, but, in general, to whosoever may be 
holder of bank notes, for the social compact, by virtue of 
which those notes become money, merges and mutualizes all 
debts and credits of the money system. 

In reviewing this process we are led to the following con- 
clusions (105a) : 

1. So long as the bank notes are held by the bank, or are 
in the hands of the borrower, they are not money in the full 
sense of the word, but are merely blanks or tokens adapted to 
become money. Their holder is both debtor and creditor; 
debtor by reason of the promise to return the notes or their 
equivalent, and creditor by reason of his possessing the notes. 

2. The notes become currency and are added to the volume 
of money in circulation when the borrower gives them in ex- 
change for valuable things or services, and whosoever accepts 
them in exchange for what he supplies becomes creditor of 
the money system. It is in this transaction that the currency 
is issued. 

3. The notes are nominally the bank's promissory notes. 
But it is not the bank that is the ultimate debtor. The bank 
is not in possession of the substance of credit, but only of 
instruments of credit conveying a right to wealth subject to 
legal seizure, wealth in possession of the real debtors, the bor- 
rowers from the bank. The notes in circulation are instru- 
ments of credit secured by other instruments of credit, the 
ultimate debtors being those who are in possession of the 
credit substance, the wealth conditionally owned by the holders 
of the bank notes (73). These possessors of the credit sub- 
stance are the real debtors of the bank note system ; they are 
the real issuers of the notes (264, 303). 

The credit instrument furnished by the real issuer, namely, 



103] MONEY 115 

the promissory note through which he pledges his property, 
lies deposited in the bank. The bank, therefore, and not the 
government, is the custodian of the pledge which conveys the 
right to the credit substance. But in order to hold the bank 
to the proper performance of its function, the government has 
exacted from the bank another security. The bank is really 
the government's agent, performing the function of distribut- 
ing the currency, of holding the pledge, and incidentally of 
acting as insurer of this pledge (220, 289). 

It is thus seen that the currency so issued is doubly secured ; 
first, by the borrower's acknowledgment of debt, which forms 
part of the bank's assets, and second, by the bank's security 
deposited in the national treasury. We shall term these the 
issuers' and the agents' pledges (286, 288). 

Continuing our illustration, we find that in due time the 
manufacturer pays his note by returning the borrowed money 
to the bank. If he pays with notes of that bank, they are 
thereby momentarily retired from circulation and may be re- 
issued by the same or by other borrowers. But if he uses other 
means of payment, whether other notes, checks or coin, the 
security underlying these takes the place of the security he 
withdraws. 

The bank may become a real issuer of its own notes by 
using them, say, in paying for the services of its own employes. 
The notes so issued are then still doubly secured, namely, first, 
by the assets of the bank, and second, by the bank's security 
held in the national treasury. 

The notes of a bank may enter into circulation through a 
depositor of the bank who is not a borrower and who, therefore, 
cannot be considered an issuer. The nature of such transaction 
will be explained at a further stage of our examination (105&). 

103. Evolution o£ Modern Banking. — Before the dawn of 
the modern era commerce depended chiefly on gold and silver, 
in the form of bars as well as coin, for means of payment. It 
became a practice of the goldsmiths who made a business of 
weighing and testing the precious metals for the merchants to 
also take these metals and other valuables for safe keeping in 
their strong boxes. Gradually, goldsmiths located in different 



116 FUNDAMENTAL CONCEPTS lios 

cities became affiliated, so that receipts certifying that gold or 
silver had been entrusted to any one of them were recognized 
and redeemed by others, and these certificates came to be used 
in a limited way as a medium of exchange, passing from hand 
to hand in payment for goods (293). They were readily 
accepted, not only because they were fully secured by gold 
and silver actually held in trust by the issuers, but also because 
those issuers were known to be responsible through possession 
of wealth of their own. Our present gold certificates are of 
the same nature as were the receipts issued by these old-time 
bankers. 

The custodians of these deposits, observing that only a 
small fraction of the metals were called for at any one time by 
the holders of the receipts, conceived the idea of utilizing 
some of the gold and silver so held, by lending it out for short 
terms on promissory notes or other securities. The borrowers 
generally, instead of taking the metal with them, left it on 
deposit and accepted certificates of deposit therefor. Thus 
it came about that the certificates issued and used as money 
exceeded the amount of metal actually in store, the excess 
being covered by the pledges of the borrowers, which took 
the place of the shortage of the metal. But in order always 
to be ready to redeem the certificates that were currently 
presented for redemption, it was considered advisable to con- 
tinue this process no further than the point where the out- 
standing certificates amounted to about four or five times the 
actual bullion on hand (322a). The short terms of the loans 
enabled the bankers promptly to replenish their reserve when 
it fell below the margin, by collecting or reducing their loans 
as they fell due. 

Let us analyze these conditions. While the reserve fund of 
bullion amounted to one-quarter of the outstanding certifi- 
cates, these were covered to the extent of that one-quarter by 
the deposited metal, and the other three-quarters by the 
pledges of the borrowers. The outstanding paper was thus fully 
secured. Inasmuch as the certificates performed all the 
functions of a medium of exchange, they became the means 
of utilizing business credits as so much actual money (264), 



104] MONEY 117 

One-quarter of the value of this money was therefore based on 
wealth in the form of precious metal, and the other three- 
fourths was based on credit pledges of the borrowers and 
was, accordingly, nothing more than monetized credit. 

This presents a brief review of the evolution of bank note 
currency. The continued use of such currency clearly de- 
pends upon a faithful compliance with the necessary require- 
ments. But the possibility of deriving large profits from the 
issue of bank notes led to the abuse of this system, through 
ignorance or dishonesty. History records numerous instances 
of such abuse and of the financial disasters that followed; 
and the so-called "wild-cat banking" in the United States 
during the middle decades of the nineteenth century may be 
cited as a notable example (322&). To avoid a recurrence 
of such irresponsible note issues, the federal government as- 
sumed control of the issue of bank notes by according the 
privilege to banks chartered by it, imposing at the same time 
an annual tax of ten per cent., virtually prohibitive, on all 
circulating notes except those issued through national banks. 

104. Bank Credit. — When banks added to their business 
of money changing and money lending the function of effect- 
ing the transmission of pa^onent in the busings world, a new 
medium of exchange, now known as "bank credit," came into 
existence. The volume of this medium of exchange is now 
far greater than that of all other forms of currency combined. 

Bank credit is identical in its general nature as well as in 
the process of its generation with the medium of exchange 
formed by the certificates issued by the old-time goldsmiths. 
Differences exist only in some of the details. Thus to-day de- 
posits consist of currency, checks, and drafts instead of gold 
and silver metal, and the deposit banks, instead of issuing 
certificates, merely enter on their books the deposited sums to 
the credit of the depositors and authorize them to draw against 
this account "checks" or "drafts," which are orders on the 
bank to pay specified sums of money to designated persons or 
to their order. Borrowers also, instead of receiving money 



118 FUNDAMENTAL CONCEPTS [104 

or certificates, have their deposit account credited with the 
borrowed amount which they are then free to draw upon. 

A large portion of the money received from depositors is 
utilized by the banks in loans. The pledges of the borrowers, 
as they are added to the resources of the bank, take the place 
of the money furnished by the depositors and withdrawn by 
the borrowers. In this way the wealth of the borrowers, repre- 
sented by those pledges, becomes the largest part of the 
ultimate basis of the bank credit which is utilized as a medium 
of exchange. In the last analysis, the borrowing is a process 
of turning business credit into currency, a process of monetiz- 
ing credit, and this monetized credit attains wide circulation 
through a system of interchange, organized to include prac- 
tically all baliks of the country. 

This monetary system has its peculiar features and is par- 
ticularly distinguished in that the money exists in the form 
of book account, independent of tokens. As the name "bank 
credit" implies, the money itself consists of the credit of the 
various banks, the bulk of whose assets consists of the pledges 
of borrowers. The real substance of this kind of money is 
therefore made up principally of the borrowers' business 
capital, the wealth that sustains their loan pledges. The 
volume of this money is measured by the amount owed by 
the debtors of the system to the creditors of the system. Only 
when some of this credit is being transferred from hand to 
hand is it put in the form of tokens, namely, bank checks; 
hence the volume of bank checks which at any moment may 
be in transit is no criterion of the existing volume of this form 
of money. 

There is, however, a limit beyond which the volume of this 
money cannot safely be increased. A certain amount of lawful 
money must be held in reserve to meet the current demands of 
depositors for cash. Banks established either under the 
national banking law or under the laws of our several states 
are forbidden to increase or renew their loans when their 
reserve is below a certain percentage of the sum of their 
liabilities to depositors. The ratio necessary for insuring the 
safety of the system has been indicated by experience, and 



104] MONEY 119 

the law merely specifies this ratio as a necessary safe^ard. 
Nominally, the cash reserve which the law prescribes for 
national banks in cities is 25 per cent., and for country banks 
15 per cent. (292), but owing to the legal provision which 
allows a bank to include as part of its reserve such amounts 
as it has deposited in banks located in certain cities, the 
average cash reserve in actual money comes down to about 
one-eighth — or even less — of the total deposits (255) . By this 
system each dollar held in bank, in conjunction with seven 
dollars' worth of assured business credit, is made to do the 
work of eight dollars of money. About seven-eighths of the 
volume of banking power, then, is business credit performing 
the function of a medium of exchange (238a, 281, 287) . 

The cash reserve which banks are legally required to main- 
tain, though reduced from the nominal rate by the provision 
above noted, must consist of ' ' lawful money. ' ' But the amount 
of such money is limited, and in the nature of things only a 
portion of this amount can be retained by banks, the other 
portion remaining in circulation. The constraint which pre- 
vents banks from extending their credit by increasing their 
loans after their reserve falls below a certain percentage of 
their deposits inevitably imposes a limit on the expansion of 
bank credit, in other words, on the use of assured business 
credit as a medium of exchange. Under the existing system, 
the sum-total of all bank credit subject to check available in 
the United States cannot be more than about eight times the 
sum of money actually remaining in reserve (2386, 293). 

If a deposit and discount bank were to start with no re- 
sources except the funds of its depositors, using the income 
from discounts to defray its running expenses and to cover 
the average of such losses as are likely to occur, its ''bank 
credit" would remain just fully covered by the securities 
of the borrowers plus the cash reserve. Practically, however, 
there should be an excess or margin in the bank's assets to 
cover unforeseen shortcomings of the borrowers ' securities, and 
this is afforded by the net resources of the bank itself, namely, 
the capital stock, plus undivided profits, or "surplus," if such 
there be. These net resources are owned by the stockholders, 



120 FUNDAMENTAL CONCEPTS [104 

whose claims are second to all other claims against the bank's 
assets (304), and therefore constitute an insurance reserve or 
margin, without which depositors would scarcely entrust their 
money to the bank. 

Bank checks, viewed as money tokens, are analogous to 
bank notes, from which they differ only in a few particulars. 
Apart from the agents' security — the bonds deposited with 
the government — the two forms of exchange medium are alike 
in being secured in part by money and in part by business 
credit ; both are redeemable in lawful money by the bank named 
on their face ; and both come within the scope of the general 
consent which makes them acceptable, at least within their 
respective spheres, as a medium of exchange. Thus both pos- 
sess the essential features of credit money. 

Their difference extends only to details which, to be sure, 
are characteristic in their way. The specific features of the 
bank notes are such as to fit them for general circulation as 
currency, while the peculiarity of checks is that they are highly 
convenient means of making, and comparatively safe means of 
transmitting, payments, especially of larger sums. 

Checks differ from bank notes in that they are written and 
issued by the party who desires to make payment, and are made 
out for the specific sum to be paid. A check, accordingly, serves 
generally for one payment only, and, being deposited by the 
payee in bank, is returned to the bank on which it is drawn 
for collection or clearance. For this reason it is not adapted 
for general circulation. Moreover, bank credit transferable 
through check has no other security than the assets of the 
particular baak, and has accordingly no other margin of se- 
curity than the stock and possible surplus of that bank. The 
government exercises no direct regulation or control over the 
issue of checks and gives no assurance of their validity, as it 
virtually does in the case of bank currency which is doubly 
secured, one of the securities being in custody of the govern- 
ment. If a check is invalid through lack of credit of its issuer, 
it is returned unpaid to its depositor, who has recourse to 
the maker of the check. In order to preserve this recourse, 
each individual or bank through whose hands the check passes 



105] MONEY 121 

records such passage by ''endorsing" it, and in practice no 
check is accepted in payment, or redeemed in cash, unless the 
last endorser is recognized as responsible. 

105. The Real Issuer of Bank Credit. — Inasmuch as the 
system of bank credit subject to check constitutes in itself a 
distinct monetary system, it necessarily follows that it has its 
own particular circle of debtors and creditors (92). A brief 
examination of the case will show that the borrowers from the 
bank are the debtors of the system, and the depositors of the 
bank are the creditors, the bank being merely an intermediary 
agent (288). 

The process by which bank credit is established consists in 
the bank according "credit" on its books to a borrower on 
basis of the borrower's obligation to discharge the debt at a 
future time. If now this borrower, by drawing on the credit 
so obtained, buys goods with his check, then his bank credit is 
used for the first time as a medium of exchange, and when the 
payee deposits the check, the credit so acquired is to him what 
so much money would be. 

The analogy existing between bank credit and bank notes 
is apparent from the following conclusions which are parallel 
to those which we have reached with regard to bank notes 
(102a) : 

1. Before a borrower who has been given credit on the 
books of a bank draws upon it, this bank credit is not yet 
money in the full sense of the word, but is ready for issue 
through check. The borrower is yet both debtor and creditor 
of this money system; debtor as a borrower from the bank, 
and creditor by virtue of his deposit account. 

2. Bank credit is put into circulation when the borrower 
uses it in payment, through check, for valuable things or 
services ; this first use of bank credit by the borrower signalizes 
its issue. The individual who accepts the check in payment 
and deposits it becomes creditor of the system. The bank 
credit so acquired serves as evidence that he has given wealth 
to the community, and it conveys to him that command of 
the market which, like the possession of currency, enables him 
to get from the community an equivalent in return. 



122 FUNDAMENTAL CONCEPTS [106 

3. While it is nominally the banks which are indebted to 
the depositors, it is really the borrowers from the bank who 
are in possession of the credit substance that are the real 
debtors. The bank merely possesses the instruments through 
which the credit substance, the real wealth, is pledged. The 
borrowers, therefore, are the real issuers of the bank credit 
(264, 287), and the depositors are the real creditors of this 
money system. 

Whenever a borrower of a bank pays his loan, the volume 
of bank credit is thereby reduced; the portion he had issued 
is retired. Indeed, the process of issuing and retiring of bank 
credit is going on incessantly. This is one of the incidents of 
the system, and while it may appear complicated in its details, 
the system in its general aspect remains simple enough. The 
borrowers and the depositors of banks are the debtors and the 
creditors of the system. In case the total of a bank's deposits 
exceeds the total of its loans, the excess is covered by the 
bank's reserve and tangible property, and the bank is to that 
extent debtor of the system. If, on the other hand, the total 
loans exceed the total deposits, the bank is creditor of the 
system for the difference. 

We can now understand what happens when a depositor 
who is not a borrower checks out the bank's notes and puts 
them into circulation (102&). By so doing, this depositor's 
bank balance is reduced and the volume of bank notes in 
circulation is increased. This increase is therefore attended 
by an equal reduction of the sum total of all bank credits 
subject to check. There is no increase of the sum total of all 
available money, but only an increase of bank note circulation 
and an equal reduction of the total volume of simple bank 
credit. The transaction is not one of issue, but one of a sub- 
stitution of one kind of currency for another. 

This simply confirms that bank notes are merely bank 
credit put into a form in which it can be used as a circulating 
medium of exchange. Being secured through the ''agents' 
pledge," the bonds deposited in the national treasury, the 
government undertakes to supervise and guarantee the issue 
of these notes. But as we have already seen, these notes are 



106. 107] MONEY 123 

really nothing more than business credit employed as a medium 
of exchange. 

io6. Subordinate Systems. — There are yet other systems 
of exchange, mostly of a restricted compass, which require 
passing mention here. According to the premises from which 
we started, any agreement, expressed or implied, among any 
number of people, whether only two individuals or many 
millions, to use certain things or accredited tokens of those 
things for facilitating the exchange of services or goods, must 
be considered as establishing a monetary system. 

Such a system, for instance, is that of so-called store orders. 
It was formerly customary in some places to pay at least a 
part of workmen's wages in orders upon certain dealers in 
merchandise. These "store orders," though not redeemable 
in any form of money, were yet redeemable in merchandise at 
the specified stores, and for this reason they possessed value 
(96). They were, of course, not adapted for general circula- 
tion, but within the circle in which they did pass they were 
manifestly a medium of exchange, being in fact a legal-tender 
in payments due to the designated dealers. 

Postage stamps as well as railroad and theatre tickets may, 
in a way, be considered a form of money, figuring in the sale 
of certain services. In the same category are the tickets for 
meals or drinks issued by clubs, hotels and restaurants. Finally, 
we may even say that all essential elements of a monetary 
system are momentarily present in every case of barter. Each 
participant agrees to accept one of the things in exchange for 
the other. Thus we find that there is really no sharp line of 
distinction to be drawn between the modern system of ex- 
change by means of legal-tender currency and the original 
method of simple barter. Our most refined and complicated 
system of currency is but a result of gradual evolution from 
primitive barter and does not differ from it in its essential 
nature, 

107. The Value of Money. — On taking up this topic, John 
Stuart Mill warns his readers of the confusion liable to arise 
from the popular phrases "money is dear" and "money is 



124 FUNDAMENTAL CONCEPTS [107 

cheap," which are employed to describe those conditions under 
which money commands a high or a low rate of interest. This 
admonition is quite as necessary now as it was then, for those 
phrases are still as much misused and as much misunderstood 
as ever. The reason why money has the power to command 
interest is totally different from that which gives it the power 
to command commodities in exchange, and the descriptions 
"dear" and "cheap," as currently applied to money, are 
responsible for endless confusion. This confusion of ideas goes 
so far that many otherwise well informed men are firmly per- 
suaded that the purchasing power of money depends entirely 
on its power to command interest (360). Nothing could be 
farther from the truth, and no better illustration of the 
erroneous nature of this idea can be cited than the fact that 
the purchasing power of money and its interest-bearing power 
or interest rate vary quite independently. In fact, the in- 
terest-bearing power of money is frequently high when its 
purchasing power is low, namely when prices are high. There 
is no direct relation between these two faculties of money, 
each being the result of a separate cause. Under the present 
heading we shall confine ourselves to an analysis of the ex- 
change value, that is to say, the purchasing power of money, 
leaving the interest commanding faculty for future considera- 
tion. 

In the development of commerce various staple commodities 
have been used in effecting compound exchanges and have 
thus performed the function of money (123). Such com- 
modities were accepted in barter merely to be used in sub- 
sequent barter. In this way they passed from hand to hand 
until they happened to come into possession of some who had 
use for them and who accepted them for that purpose. Such 
media of exchange passed, as a matter of course, at their 
commodity value. 

In the course of time only silver and gold remained in use 
in this manner, being for many reasons better adapted than 
other things for such use. In the middle ages there grew 
up the custom of having goldsmiths determine the weight 
and fineness of the silver and gold tendered by merchants in 



108] MONEY 125 

payment of goods. It is thus apparent that the metals passed 
in exchange as merchandise performing the function of money. 
And when, later on, certificates of deposit of these metals, and 
ultimately promises to pay gold or silver, that is to say, 
credit, took the place of the metal itself, the value of the 
metal still determined the value of this medium of exchange. 

This fundamental law of the value of money prevails 
now as it prevailed then. The value of money equals the 
value of that of which the money is made, be it gold or credit 
(125), So long as gold is the value denominator, the ex- 
change value of the metal gold determines the purchasing 
power of all money which consists of gold or of credit redeem- 
able directly or indirectly in gold. 

The proposition just stated was taken for granted when 
we had occasion to advert to the value of money in connection 
with the description of the several types of currency. There 
is, however, yet to be considered the influence which the 
amount of the metal used as money has upon the market 
value of the metal and therefore of the money. By the use of 
this metal as a money substance the demand for it is cor- 
respondingly increased and its exchange value accordingly 
affected.^- 

io8. The Value of Gold. — This influence can best be 
studied by the aid of the graphical method, but in so doing 
we must temporarily adopt a value denominator other than 
gold, say a composite unit (31), and assume that the demand 
for and the supply of gold were rendered in terms of this unit. 

Suppose that in Fig. 11 the curves 88' and DD' represent 
the supply of and the industrial demand for gold, while OQ 
measures the total amount of gold extant. If there were no 
additional demand, the value of gold would adapt itself to 
the ordinate qa. But if an amount of gold equal to OV is 

^ The difference should be noted that exists between " adopting 
gold as a value denominator " and " using gold as a money substance." 
In a later chapter it will be shown that it is possible to abandon gold 
as a money substance without giving it up as a value denominator. 
Under such conditions the monetary demand for gold would become re- 
duced to a negligible quantity. 



126 FUNDAMENTAL CONCEPTS [108 

held apart in the channels of exchange, in the form of coin 
in circulation and of reserve in treasuries and banks, the 
supply remaining for industrial uses is reduced to VQ. The 
demand curve DD' must then be referred to this remainder 
alone as the available quantity, that is, the curve must be 
bodily shifted into the position EE'; and the current value of 
gold, expressed in terms of the composite unit, will then be 
given by the ordinate q'a' of the new point of intersection a' 
(115). While, in the absence of a demand for gold for 
monetary use, the quantity of the metal demanded for in- 
dustrial uses would equal Oq, the diversion of the volume OV 
for monetary uses not only increases the value of gold, but 
also reduces its industrial demand to Vq'. 

The total amount of gold OQ is divided into three parts, 
the first, OV, being applied for monetary uses; the second, 
Vq', being offered in the market in one form or another; and 
the third, q'Q, being the quantity which exists in various 
forms, not offered in the market (59). 

The increase of the value of gold from qa to q'a' has 
greatly stimulated its production. Every available source is 
utilized, and every new mining field is rapidly exploited. 

The point V that divides the amount of gold applied to 
financial uses from that remaining in the field of industry 
and otherwise extant, shifts its position under various circum- 
stances. When brought to the mint for coinage, gold is trans- 
ferred from the industrial to the financial field. When, as 
may happen, gold is withdrawn from monetary use and applied 
for industrial purposes, the relation of the respective quan- 
tities is changed in the other direction. When, for any reason, 
money becomes "scarce," the demand for gold for monetary 
use increases, entailing a transfer of the metal from the in- 
dustrial to the financial field, thereby increasing the quantity 
OV, correspondingly diminishing the quantity VQ and dis- 
placing the point V accordingly. These changes account in 
part for the fluctuation of prices as the conditions of business 
vary from time to time. 

The diagram clearly exhibits how the value of gold, and 
with it the purchasing power of the dollar, is affected by the 



109] MONEY 127 

use of gold as a money metal, and why it is that the value of 
gold is sustained at a higher level than it would he if large 
quantities of it were not used for coin and hank reserve. But 
it is practically certain that sooner or later methods of ex- 
change will be developed through which credit will displace 
gold as a substance of money more completely than now, so 
that the greater portion of gold now held in treasuries and 
banks will be liberated, when the value of gold, no longer sus- 
taiaed by monetary demand, will fall and approach its natural 
rate ga. Fig. 11 (320). 

log. The Price of Gold. — Our reasoning has thus far been 
based on the proposition that the value of standard coin equals 
the value of the metal contained in it, and that the "price" 
of gold, expressed in ' ' dollars, ' ' cannot change so long as gold 
is the current value denominator, no matter how much the 
value of gold, expressed in some other value denominator, 
may change. 

There are what appear to be exceptions to this rule which, 
however, on critical examination will be found to be fully in 
conformity with it. These apparent exceptions are often im- 
properly cited as contravening the principle in question. 

There is, of course, always a difference of price between 
the commercial and the assayed metal. For obvious reasons 
gold cannot be marketed at its coinage value unless it is assayed 
and the degree of fineness ascertained and guaranteed. Old 
jewelry usually brings a comparatively low price, partly be- 
cause of the cost of collecting and refining the same to put it 
in marketable form, and partly to allow for differences due 
to the crudity of the assay. The same is true of the gold dust 
brought from mines, especially when brought from newly dis- 
covered fields. The cost of assaying and treating such dust 
is increased by the cost of carriage to the nearest accredited 
refinery. 

Owing to the free and gratuitous coinage of gold, whereby 
the owner of refined gold can have it converted into money 
without cost, the difference between wholesale and retail price 
exhibited by other commodities is not ordinarily observed in 
the gold market. It is, however, not totally absent. In ex- 



128 FUNDAMENTAL CONCEPTS [no 

changing foreign gold coin for domestic money, the broker 
charges a commission for the trouble and expense of again 
"selling" these pieces of gold, a charge which is clearly- 
analogous to that which the retail merchant adds to the 
wholesale price of the goods he sells. Of a like nature is the 
slight premium which the seller of bar gold must generally 
pay when he desires money for his metal. As a matter of 
fact, the price of gold in the London market fluctuates and is 
actually quoted in market reports (122). These variations 
must, of course, not be confounded with those which attend 
the use of depreciated legal-tender credit currency (96). The 
real explanation is in line with that of differences in inter- 
national exchange and may be more fully elaborated as 
follows. 

Although gold is our value denominator, and gold coin 
can have value only because it consists of the commodity 
gold, yet bullion must be coined before it can legally be used 
for the payment of an obligation. But taking the gold to the 
mint involves trouble, and the coining requires time; and in 
the measure in which owners of gold metal desire to save this 
time and trouble, they are willing to make a sacrifice by offer- 
ing it in the market slightly below the coinage value. The 
premium thus offered by sellers of gold varies according to 
circumstances and is usually so small that it is negligible in 
ordinary commercial transactions. But the fact that this 
varying price of gold is never above the coinage price con- 
clusively precludes that other explanation which is offered 
by the adherents of the volume theory of the value of money 
(123). 

no. Bimetallism. — Until a comparatively recent period, 
gold and silver were used independently as money. Silver, 
being more abundant than gold, was more largely used and 
naturally became the most widely accepted standard of value 
in trade and commerce. At the same time, gold was accepted 
at a varying course, according as its market value, compared 
with the silver standard, varied. 

To avoid the complications arising from the ever changing 
relation in the value of silver and gold, efforts were made by 



1101 MONEY 129 

several governments to maintain a fixed relation between the 
two metals by force of law. Both metals, in the form of coins 
of specified weights at a stated ratio, were made legal tender. 
Various enactments were adopted by different countries with- 
out international cooperation. France established a system 
of bimetallism by decreeing 15% weights of silver as the 
equivalent of one weight in gold. At about the same time the 
United States adopted the ratio 15 to 1 in its newly established 
coinage, and subsequently both countries found it necessary 
to change the coinage ratio so that the silver unit was 16 
times as heavy as that of gold. A coin containing 4121^ 
grains of silver, '/k, fine, and one containing 25.8 grains of 
gold, also ^/lo fijie, were each declared by the laws of the 
United States to be legal tender for one ' ' dollar. ' ' 

These national enactments proved unavailing to maintain 
gold and silver at a fixed value ratio, and efforts were put 
forth from time to time to establish such a ratio by international 
cooperation. Arguments were advanced with a view of demon- 
strating that a fixed value ratio could be maintained in- 
definitely by admitting both metals to free coinage at that 
ratio. It was held that if, through any cause whatever, one 
of the metals composing the bimetallic system should fall 
below the legally fixed ratio of value, the immediate result 
would be that more of the metal would be coined for circu- 
lation, while coin of the other metal would be withdrawn from 
circulation and turned into the market as bullion. The value 
of the cheapened metal would be boosted up by the reduction 
of its amount in the market, and, at the same time, the value 
of the other metal would be depressed, because the market 
supply would be increased through the melting down of coin. 
This, it was asserted, would constantly maintain the parity 
of the two metals at the ratio fixed by law. 

It is, however, obvious that this process of equalization 
through free coinage must fail whenever the cost of producing 
either metal changes materially. The relatively dearer metal 
would continuously be withdrawn and finally disappear from 
circulation, leaving only the cheaper metal as currency. 

Happily, a general recognition of the impracticability of 
9 



130, FUNDAMENTAL CONCEPTS [in 

the double standard has led to its definite abandonment. The 
single gold unit has now come to be adopted as the measure 
of value throughout the commercial world. 

The use of silver for subsidiary coin in connection with 
gold as the standard is sometimes mistaken for a sort of 
bimetallism, but this is an error, inasmuch as bimetallism 
requires a free and unlimited coinage of both metals. 

III. Composite Value Units. — In treating the subject of 
the value unit (31&), discussion of one of the objections to com- 
posite value units was at the time deferred. This matter can 
now be taken up again. 

The nominal value of a credit instrument — that is, an 
acknowledgment of debt — is fixed by the value of the things 
or services which the debtor promises to give. In other words, 
a credit instrument can have a definite value only if it is a 
valid promise to deliver specified things or services. For the 
same reason, credit money can have a value expressed in dol- 
lars only if redeemable in "dollars." In the case of a com- 
posite unit, a "dollar," instead of being so many grains of 
gold, would consist of a scheduled quantity of a number of 
commodities. Thus a ten-dollar note, to have a value corre- 
sponding with this unit, must be redeemable, not in 258 grains 
of standard gold, but, say, in 15 grains of gold plus 10 pounds 
of flour plus 25 pounds of cotton plus 200 bricks plus 20 
feet of lumber and so forth, or whatever schedule may have 
been adopted. The impracticability of such a system of re- 
demption is self-evident. 

To obviate this difficulty of keeping the money at par with 
the adopted standard, the following plan has been suggested. 
Let the dollar of currency be redeemable in gold, the amount 
of which, instead of being fixed, is to be increased or reduced, 
according as the value of gold falls or rises in comparison with 
the adopted composite unit. This would require the intro- 
duction of a constantly changing "index number" with which 
to multiply the present weight of 25.8 grains, in order to 
ascertain the amount of gold in which the dollar of currency 
is to be redeemed. 

If practical means could be devised accurately to determine 



Ill] MONEY 131 

this constantly varying index number, the total market value 
of the scheduled commodities would in consequence remain 
stationary, and, in the measure in which this aggregate of 
things is representative of the general market, the mean price 
level of all things would be approximately stable. 

Whether this proposition, which has lately been championed 
and elaborated in detail by Irving Fisher, could be success- 
fully carried into practice, and if it could be, whether it 
would have a beneficial effect commensurate with the work 
involved, is open to question. By whatever method the index 
number is to be determined from time to time, it must be 
through reference to market reports which are by no means 
proof against ''manipulation" and, even apart from this, are 
often but crude approximations between two stated margins, 
an indefiniteness in part due to the difficulty of sharply defin- 
ing quality (31a). Moreover, if the index number is to be 
corrected at frequent intervals, before previously announced 
changes have had their full effect upon prices generally, the 
market reports would continue to indicate a need for further 
change when no such change were really needed, and the 
official correction would over-reach itself. And if longer 
periods are chosen, the expectation of impending changes is 
not unlikely to be a source of business disturbance because 
of the sudden and intermittent effect on prices generally. 

Another proposition for maintaining currency at par with 
a given composite unit is sometimes advanced, namely to in- 
crease or reduce the total volume of currency, as the sum total 
of the market value of the composite unit falls or rises, but 
it will be shown later (321) that every attempt along this 
line must prove abortive, since the proposition is based on an 
erroneous premise. 

The fact that projects of this kind are put forth from 
time to time is due to the belief of many that our frequent 
financial upheavals result from the fluctuating value of the 
"dollar," manifesting itself in a corresponding but opposite 
fluctuation of prices. That such is not the case will become 
apparent in the further course of our investigation. 



132 FUNDAMENTAL CONCEPTS [112, ii3 

112. Depreciated Value Unit. — When depreciated legal- 
tender notes — that is, unfulfilled promises to pay "dollars" 
to bearer — remain in circulation as the current money, the 
dollar of currency will not be equal to the dollar of the 
promise, whether gold or silver, but will be a certain variable 
percentage thereof, that percentage depending on the general 
appraisement of the readiness or ability of the government to 
ultimately fulfil its promises (76). 

In the United States, from the time of the issue of the 
"greenbacks" up to the year 1879, the nomiiial unit of value, 
the * * dollar, ' ' was 3711/4 grains of pure silver or 23.22 grains 
of pure gold, while the actual current unit was the depreciated 
value of the government's unfulfilled promises to pay such 
"dollars" to bearers of greenbacks. The real dollars, both 
gold and silver coin, were accordingly above the dollar of 
this currency and did not circulate (96). The former became 
merchandise, the value of which, expressed in terms of dollars 
of the currency, was regularly quoted in the market. The 
price of both metals went up and doAvn as the probability of 
an early resumption of specie payment appeared to vary. But 
while the prices of both metals rose and fell concurrently, or 
nearly so, the price of dollars of silver was not equal to that 
of dollars of gold, because the prevailing ratio of exchange 
of the two metals was not precisely as 16 to 1. 

There were thus three legalized units of value (123), only 
one of which, that of the lowest value, was the customary 
unit of account. The fact that the dollar of account con- 
tinued as such, while the dollar of gold and the dollar of 
silver rose and fell in market value, was by many construed as 
proving that the value of money had nothing to do with the 
value of the money metals (322). 

113. The Seignorage Theory. — Ricardo promulgated the 
theory that the value of coin equals the value of the metal 
contained therein plus the amount charged for coining (115). 
be this charge only the actual cost or such greater amount as 
the sovereign may exact for the purpose of a revenue from 
his prerogative of issuing currency, this charge being termed 



113] MONEY 133 

"seignorage" (98). The following quotation presents his 
view on this point : 

While the state coins money, and charges no seignorage, money 
will be of the same value as any other piece of the same metal of equal 
weight and fineness; but if the state charges a seignorage for coinage, 
the coined pieces of money will generally exceed the value of the un- 
coined pieces of metal by the whole seignorage charged, because it will 
require a greater quantity of labour, or, which is the same thing, the 
value of the produce of a greater quantity of labour, to procure it. 

While the state alone coins, there can be no limit to this charge of 
seignorage; for by limiting the quantity of coin, it can be raised to any 
conceivable value. 

It is on this principle that paper money circulates. The whole 
charge for paper money may be considered as seignorage. Although it 
has no intrinsic value, yet, by limiting its quantity, its value in ex- 
change is as great as an equal denomination of coin, or of bullion in 
that coin. On the same principle, too, namely, by a limitation of its 
quantity, a debased coin would circulate at the value it should bear, 
if it were of the legal weight and fineness, and not at the value of the 
quantity of the metal which it actually contained.^ 

Upon close examination this statement is found to embrace 
a hazy confusion of two independent theories of the subject 
(116a). If the value of money is determined by the quantity 
of labor necessary to procure, not only the metal or paper 
of which the money token is made, but also that with which 
to pay the seignorage charged by the government for turning 
the metal or the paper into money, then an arbitrary limita- 
tion of the quantity of money so issued can in no way affect 
the value of this money. On the other hand, if an arbitrary 
limitation of the issue is essential to maintain the value of 
the money above the value of its substance, then the quantity 
of labor, particularly that covering the seignorage, cannot have 
anything to do with the case (116&). A seignorage charge 
might indeed impose some limit on the amount of money that 
would be issued, as this toll would naturally react on the 
demand, but Kicardo and his followers predicate an inten- 
tional, an arbitrary limitation of the amount to be issued, and 
this is something radically different from the limitation that 
would naturally follow as a consequence of the imposed toll. 

=^ Ricardo, p. 213. 



134 FUNDAMENTAL CONCEPTS [114 

114. The Seignorage Theory Untenable. — Of the two 
theories which are embraced in the quoted statement we shall 
first take up the proposition according to which the current 
value of a coin equals the value of the metal plus the cost 
collected by the government for coinage. This theory is also 
put forward by John Stuart Mill, his statement, in brief, 
being that if the government did not coin money gratis for 
any one who furnishes the metal, coined money would be worth 
more than the bullion, for the same reason that cloth is of more 
value than yarn. Were the government to make a charge to 
cover expenses, the coin would rise to the extent of the seign- 
orage, above the value of the bullion.^* 

This, manifestly set forth as a self-evident proposition, is, 
however, by no means an ascertained fact and, on closer 
examination, will be found to be not only open to question, 
but altogether untenable. 

The use of a watch case, for instance, is to protect the 
works of a watch from injury, but in order to give it esthetic 
as well as practical utility, it is made of gold and is orna- 
mentally engraved. The work of the goldsmith has added 
value to the piece of gold. According to Mill the same reason- 
ing applies to coin. But the two cases are really quite dis- 
similar, since the object of coining is not to produce an 
ornament. Prom the first the stamp on coins had the object 
of officially vouching for correct weight and fineness, and this 
purpose has remained the same till now, even though art has 
added beauty to the piece. Surely, a stamp attesting that a 
piece of gold has a stated weight and is of a stated degree of 
fineness can add no value to this gold. We must not forget 
that the gold of the coin is merely a quantity of metal (93) 
performing the function of collateral security for the face 
value of the coin. 

Let us suppose that the United States were to make a 
coinage charge of, say, 5,8 grains of gold per dollar and 
would collect this charge by making the coin of a weight of 
only 20 grains per dollar, thus returning 20 grains of coin 

'* Cf. Mill, 11, pp. 38-39, 



114] MONEY 135 

for each 25.8 grains of gold brought to the mint for coinage. 
The stamp on an eagle would still be a voucher that the coin 
is of full weight. But is this to be understood as meaning 
that its weight is vouched to be 258 or 200 grains? In the 
first case the voucher would be a falsehood; in the second, 
the voucher that an eagle consists of 200 grains would be a 
declaration that a dollar is 20 grains of standard gold, and 
the purchasing power of the dollar would adapt itself accord- 
ingly.-^ 

Or suppose the government were to make coin of full 
weight, namely at the rate of 25.8 grains of standard gold per 
dollar, and would demand payment for coinage from those 
who bring gold to the mint. What would be the result upon 
the value of that coin? 

Since the function of the metal in any standard coin is 
that of a full collateral security for the debt of which the 
coin is a token, and since this collateral, when applied to 
cancel the debt, has value only as bullion, it follows that the 
coined piece of gold cannot have a value exceeding its bullion 
value. If, then, the owner of gold who brings it to be coined 
must give besides the 25.8 grains per dollar some more of his 
gold to pay for coinage, the question arises: What would 
impel him to bear this charge, when he can sell his bullion at 
the rate of one dollar for each 25.8 grains? 

If this charge for coinage were less than the cost of selling 
the bullion in the market, then the owners of gold would 
doubtless be willing to pay this charge for having their gold 
coined, thus sacrificing the tax so paid, since coining would 
save them the cost of marketing the gold. But if the govern- 
ment's charge were to exceed the cost of marketing the metal, 
then gold would not be brought to the mint for coinage, but 
would go uncoined, unless the government itself were to buy 
the metal and coin it for its own requirements. 

That the value of a standard coin does not exceed its bullion 

'"' It is here assumed that the 200 grain eagle would be standard 
coin, that is, not redeemable by the government in 258 grains of gold, 
for in that case the gold coin would be a credit token, like subsidiary 
coin. 



136 FUNDAMENTAL CONCEPTS [115 

value is fully borne out by history. When the "pound" of 
silver was coined by European monarchs in pieces less than 
their nominal weight (98a), the coined silver did not circu- 
late at its nominal or legal value, the ''pound" of silver, 
but at a value corresponding with the precise amount of silver 
the coin actually contained (986). This fact is certainly not 
in harmony with the seignorage theory. 

Our experience with greenbacks is equally fatal to the same 
theory. The value of the depreciated greenbacks always re- 
flected the average expectation of their ultimate redemption. 
During the civil war a battle lost by the federal troops at 
once advanced the price of gold ; a victory gained was promptly 
followed by a fall of gold quotations. Since the resumption 
of specie payment these notes have remained at par with gold. 
All these facts are wholly inconsistent with the seignorage 
theory, namely, with the notion that the value of these notes 
was determined by the charge which the government made for 
their issue. The facts can be clearly accounted for only on 
the theory of currency value which we have considered in the 
preceding pages (107-112). 

"Without doubt, the seignorage theory was conceived and 
formulated in the endeavor to account for the phenomenon 
presented by subsidiary coin. It did not occur to Kicardo and 
his followers that such coins are in reality credit instrmnents 
which are accepted by the issuing government at their face 
value. Fractional coin does indeed circulate at a value 
exceeding its metal value, but this is so because, in the first 
place, fractional coin is redeemable by law in standard money, 
and second, because it is accepted at par in payment of taxes 
(96). When the subject of credit is correctly understood, the 
mystery attached to subsidiary coin disappears, and the seig- 
norage theory is found to be a misconception. 

115. The Volume Theory of the Value of Money. — 
Among the various ideas concerning money there is none put 
forward more persistently than that known as the "Volume 
Theory of the Value of Money." According to this theory 
the purchasing power of the dollar depends upon the relation 



115] MONEY 137 

which the supply of money bears to the demand for money; 
it falls — that is, prices rise — as the supply of money is in- 
creased or the demand reduced; it rises — that is, prices fall 
— when the demand for money is increased or the supply 
reduced. 

This view of the relation of money to prices arises out of 
the use of the term "dollar" in the sense of "money" (78, 
88, 95) which has led to the notion that the dollar is a "money 
unit" instead of what it really is, a value unit, consisting of 
a stated amount of the standard commodity. Along with 
other theorists on the subject John Stuart Mill appears to 
have believed in the existence of a unit of money the value 
of which may vary from the value of the gold contained in 
the standard money, when he says, apropos of conditions 
resulting from an increase of currency: 

An ounce of manufactured gold will become more valuable than an 
ounce of gold coin, by more than the custom.ary difference which com- 
pensates for the value of workmanship; and it will be profitable to melt 
the coin . . .*■ 

With the introduction of a "money unit" which may 
differ from the gold unit we are confronted with a theory to 
account for the value of money which differs from that which 
traces the value of money to that of the standard commodity 
(107-112). Both cannot be correct, and in order to find 
which of the two actually prevails, we must subject them to 
a critical comparison. 

According to the volume theory the value of money de- 
pends upon the quantity of money in circulation and the 
demand for money (322). According to the other view, the 
commodity theory, it depends upon the value of that of which 
the money is composed, whether it be the commodity gold, 
or credit expressed in terms of that commodity, or, according 
to some, upon the value of the metal plus the cost of coining 
it (113). In the one case, the value of the dollar is supposed 
to be regulated by supply and demand of money, in the other 
by supply and demand of the metal gold. According to the 

■" Mill, II, p. 89. 



138 FUNDAMENTAL CONCEPTS [ii5 

former theory, every change in the volume of money, other 
things remaining equal, is followed by a corresponding change 
of prices, even though the value of the metal gold remains 
unchanged. According to the other, a change in the volume 
of money affects prices only if such change reacts upon the 
value of gold, and even then only in the measure of such 
reaction; and, as we have already learned (108), this reaction 
is not in proportion to the change in the volume of money. 

The assumption that the value of money, like the value of 
commodities, is determined by the supply of and the demand 
for money is based on an analogy, but the analogy is irrelevant. 
Money cannot be treated as though it were a specific com- 
modity, like potatoes, hats, chairs. Money in itself is not use- 
ful in the sense of having the faculty of gratifying desires. 
Only the gold of which coin is made, or in which currency is 
redeemable, has this capacity. The demand for money is not 
a consumers' demand (58) which is reduced or satiated with 
continued gratification. Nor is the supply of currency a 
producers' supply which requires the stimulus of a recom- 
pense, for it is regulated by legislation and not by the re- 
luctance of the producer to endure the strain of production, 
varying with the amount produced. Supply and demand of 
money cannot be represented by a rising and a falling curve, 
like 88' and DD' of Fig. 6, and in the absence of the features 
illustrated by these curves there cannot be a point where 
supply and demand come to a balance, that is to say, where 
desire is balanced by reluctance (63). 

Money is not a specific commodity; its essence is that of a 
credit, each money token being a credit instrument, conveying 
a right to a stated amount of wealth (240). The value of 
money therefore follows the same law that determines the 
value of credit. And the value of credit is the amount of 
wealth which is specified as owing, and from this it does not 
differ unless the credit lacks assurance. It is the value of the 
metal gold, it is cost and utility as regards gold, which de- 
termines the value of money where gold is the standard of 
value. 



116] MONEY 139 

If it were asserted that the creation of new debts would 
have the effect of diminishing the value of all previously ex- 
isting debts in such proportion that the old and the new debts 
together would have only the same value as the old debts had 
before, the assertion would at once be recognized as untrue. 
Yet, the volume theory is based on this very assumption as 
regards all those forms of debt which through communal 
agreement are made available as a medium of exchange. 

As regards credit money, including bank credit over and 
above the metallic reserve, the real substance of that money is 
the miscellaneous wealth which constitutes the pledges that 
afford the assurance. Through the principle of credit this 
wealth is made available for the purpose of a medium of 
exchange (69), and through the communal consensus that 
wealth is invested with the faculty of doing service as money. 
This wealth is not used bodily as money, but only through the 
medium of a credit conveyance, while itself continuing in use 
for the purpose for which it was produced. The only form 
of wealth bodily in use as money is gold when circulating as 
coin, or when stored in a redemption fund or held as bank 
reserve. 

Suppose it were true that paper tokens, upon being de- 
clared legal tender for debts, acquire value by dint of the 
universal demand for a medium of exchange. These tokens, 
in order to circulate as money, must evidence that the holder 
has delivered wealth to the community and is entitled to 
receive an equivalent in return; in other words, they must 
bear witness that the holder is a creditor. Hence, if these 
tokens are not acknowledgments of debt, it would follow that 
there can be creditors where there are no debtors (89, 92), and 
this is inconceivable. 

But let us see what the advocates of the volume theory 
have to say to establish their position. 

1 1 6. Ricardo's Statement of the Volume Theory. — It was 
evidently considered superfluous by Ricardo to offer any 
demonstration whatever of the volume theory. He merely 
stated the proposition as though it were self-evident. In a 
footnote he asserts : 



140 FUNDAMENTAL CONCEPTS [117 

That commodities would rise or fall in price, in proportion to the 
increase or diminution of money, I assume as a fact which is incon- 
trovertible." 

But the fact is that this assumption is inconsistent with 
his own seignorage theory (113&), Ricardo seems to have 
overlooked that in explaining the value of money on the 
seignorage theory, and then qualifying this by adducing the 
volume theory, he was dealing, as already pointed out (113a), 
with two really incompatible propositions. As Ricardo has 
offered nothing to substantiate the volume theory, there is no 
ground for further argument regarding his assertion on the 
subject. 

117. Mill's Argument. — John Stuart Mill offers the fol- 
lowing argument as a demonstration of the volume theory : 

Let us suppose that to every pound, or shilling, or penny, in the 
possession of any one, another pound, shilling, or penny, were suddenly 
added. There would be an increased money demand,^^ and consequently 
an increased money value, or price, for things of all sorts. This in- 
creased value would do no good to any one; would make no difTerence, 
except that of having to reckon pounds, shillings, and pence in higher 
numbers. . . . Prices would have risen in a certain ratio, and the 
value of money would have fallen in the same ratio. 

It is to be remarked that this ratio would be precisely that in 
which the quantity of money had been increased. If the whole money 
in circulation was doubled, prices would be doubled. If it was only 
increased one-fourth, prices would rise one fourth. . . . The value 
of money, other things being the same, varies inversely as its quantity; 
. . . This, it must be observed, is a property peculiar to money. We 
did not find it to be true of commodities generally, that every diminu- 
tion of supply raised the value exactly in proportion to the deficiency, 
or that every increase lowered it in the precise ratio of this excess. 
Some things are usually affected in a greater ratio than that of the 
excess or deficiency, others usually in a less: . . .^* 

These quotations are taken from the chapter: "Of the 
Value of Money, as Dependent on Demand and Supply." 
This is immediately followed by the chapter: "Of the Value 

=" Ricardo, p. 326. 

="The author here manifestly means "demand for other things in 
exchange for money." 

^'Mill, II, pp. 29 ft. N 



118] MONEY 141 

of Money as Dependent on the Cost of Production," in which 
the author shows that the value of money, "in a state of 
freedom, ' ' conforms to the value of the bullion it contains. 

A pound weight of gold or silver in coin and the same weight in an 
ingot will precisely exchange for one another.™ 

Thus he artlessly presents both the volume and the com- 
modity theory together, although at best only one of them 
can be correct. On examination it will be found that the 
volume theory is the one that cannot be sustained. 

1 1 8. Mill's Reasoning Analyzed. — In the illustration in 
which all men are supposed to find the money in their pos- 
session suddenly doubled, the assumption that all men would 
thereupon pay double prices for everything they had to buy is 
by no means self-evident. Such is certainly not the case with 
people who suddenly get rich. While they may spend money 
more freely, buying things they would not have bought before, 
yet they do not usually give more money for the goods they 
buy than the ruling price of the goods. The question really is, 
what would be the ruling price of goods under the conditions 
which Mill suggests? 

If he intended to imply that not only the quantity of all 
coined metal were doubled, but that the quantity of all 
silver and gold metal were increased two-fold, and that the 
mines of these metals would henceforth be twice as prolific 
by the application of the same amount of labor, and further- 
more, that the usefulness of two ounces of the metals for all 
possible uses would henceforth equal the usefulness that 
formerly inhered in one ounce, then his conclusion would be 
sound. Prices would then promptly rise to precisely double 
their former level. But since these conditions would bring 
about a reduction of the value of the precious metals to one- 
half of what it was before, this illustration would confirm the 
commodity theory rather than the volume theory of the 
value of money, for in the absence of the additional con- 
ditions here enumerated, Mill's conclusion would not stand, 

"o Mill, II, pp. 38 f . ~ 



142 FUNDAMENTAL CONCEPTS [119 

especially if the production of each ounce of gold and silver 
would still entail as much effort as before. 

Those who have money to spend compare the effort to 
acquire the money with the gratification that can be derived 
from the goods to be obtained for it, and if the production 
of the gold or the silver of which standard coin consists 
continues to require the same effort as before, there is no 
ground for Mill 's inference that the estimated worth of a coin 
would fall to one-half if the number of coins were doubled. 
No coin that is legal tender ever passed current at a value 
below that of the metal it contained, and there is no reason to 
assume that it ever will. 

119. Newcomb's Argument. — ^More plausible is that at- 
tempted demonstration of the volume theory which is clothed 
in the garb of mathematics. This method has been adopted 
and elaborated by quite a number of recent writers. We shall 
here take up Simon Newcomb's presentation of the argument, 
and since that of others who accept the volume theory is virtu- 
ally the same, the following discussion will apply generally. 

The volume theory is held to be capable of mathematical 
demonstration on basis of the fact that at each sale the delivery 
of goods in one direction is reciprocated by the delivery of 
money of equal value in the other.^* An equation exists, 
therefore, between the flow of merchandise, or the "industrial 
flow," and the circulation of money, or the ''monetary flow" 
(245). 

The monetary flow is represented by the product V XK, 
where V is the volume of currency, namely the number of 
dollars in actual circulation, and B is the average rapidity 
of circulation, namely, the average number of times in the 
year that each dollar is used as a medium of exchange. 

In the algebraic representation of the industrial flow the 
letter K was chosen for the total traffic in merchandise and 
services during one year, but since the total value of this 
traffic may rise or fall as the price level rises or falls, the 
quantity K, which is supposed to be rendered in terms of 



W^!!^!^"aW«W>i 



»^ Cf. Newcomb, pp. 315-347, 



120] MONEY 143 

some invariable value unit (31), must be multiplied by the 
coefficient P denoting the price level, in order to obtain the 
value of the flow in terms of dollars. The letter P really 
represents the value of the assumed invariable unit in terms 
of dollars, that is, the reciprocal of the purchasing power of 
the dollar expressed in terms of this assumed unit. The 
product P X -S" is, accordingly, the industrial flow expressed 
in terms of dollars (272). 

The relation of the monetary to the industrial flow is then 
expressed by the equation (270) : 

VXE = KXP. 

In the application of this equation to prove the volume 
theory it is assumed that the annual traffic of merchandise K, 
as well as the rapidity of monetary circulation B, are de- 
termined by industrial conditions and customs and can there- 
fore be considered as constants, leaving V and P the only 
variables. If, then, the volume V is changed, it would follow 
that the price level P must vary directly as the volume V 
varies; otherwise the equation would not be satisfied. New- 
comb therefore concludes: 

that the rise in the price P would be proportional to the increase in the 
total volume F of the currency,*'' 

and this leads to the proposition (351) : 

When the volume of currency fluctuates, other conditions being 
equal, the purchasing power of each unit of money varies inversely as 
the whole number of units, so that the total absolute value of currency 
remains unaltered by changes in that volume.^ 

This is the very essence of the volume theory. On further 
analysis, however, Newcomb's conclusion will be found to be 
invalid. 

120. Newcomb's Reasoning Analyzed. — It is, of course, 
necessary to properly circumscribe the compass of the terms 
of the equation. In the industrial flow K are to be included 
only such sales of goods and services as are settled sooner or 

"^ Newcomb, p. 346. ^ Ihid., p. 346. 



144 FUNDAMENTAL CONCEPTS [120 

later through payment of money. Those sales which are 
never paid for must of course be excluded, and where sales 
and purchases are set off against one another and therefore 
are virtually barter, only the balance of the transactions which 
is settled by actual payment of money can be included in the 
factor K. 

The monetary flow here considered must be regarded as 
consisting only of such payments as are made for goods and 
services, exclusive of all other monetary movements, "While 
the volume V is to consist of all the money in use in the 
country, including both currency and bank credit subject to 
check, the quantity B must here be computed on basis of only 
those movements of money which make up the monetary flow 
as just defined. This precaution is necessary, as there are 
monetary movements which cannot be included in the present 
considerations. The repeated transfers of money in the form 
of checks from bank to bank in the course of clearance as 
well as the transfers of money between lenders and borrowers 
constitute a flow of money which is extraneous to sales or 
commodity exchanges of any kind and which must therefore 
be excluded from the monetary flow of Newcomb's equation 
(245), 

But even with these qualifications the equation is true 
only if we leave out of consideration the fact that goods 
delivered and services rendered are to a large extent paid for 
at various periods after delivery (270), Only a portion of 
the purchases made within a given week are paid for at the 
time, while, on the other hand, purchases made months before 
may be paid within the week in question. It cannot, there- 
fore, be said that within any one week, month or year the 
industrial flow must equal the monetary flow. 

When taken with the qualifications above indicated, the 
equation itself is beyond dispute. But the same cannot be 
said of the conclusions derived from it. It is inadmissible 
to assume the quantities K and B to be independent of the 
volume V, for it can be shown that it is the price level P 
which is independent of V. 

But let us follow Newcomb 's logic. 



liiO] MONEY 145 

He first argues that the rapidity B of the monetary circu- 
lation, although 

not fixed by any precise law, . . . yet can only change between 
very narrow limits.** 

He clearly shows that, by reason of certain business cus- 
toms and of the practice of paying wages and salaries at 
stated periods, the rapidity of circulation cannot materially 
exceed a certain rate, and to show that it will never be much 
less than this rate, he says : 

Every man feels that he is losing possible interest on his money 
by keeping it and therefore tries to pay it out for something as soon as 
he advantageously can.^ 

This statement requires qualification. There exists a well 
defined and widely prevalent reluctance to pay out money, 
and a corresponding desire to hold on to it for use in possible 
emergencies. Beyond that, there is a tendency to put out 
money at interest, either through the purchase of bonds, 
mortgages and so forth, or, as is the case with the vast number 
of minor traders and wage earners, to place it at interest in 
savings banks. But it is only the disbursements of money 
for goods or services, and not the putting out of money in any 
form of loan, which makes up the rapidity E, for, as we have 
just observed, the movements of money between lenders and 
borrowers must be excluded from consideration in Newcomb 's 
equation. While there is unquestionably a superior limit to 
the rapidity of circulation, though not sharply defined, there 
can be no inferior limit. While the rapidity cannot well ex- 
ceed a certain rate, there is no obvious reason why it cannot 
fall considerably below this maximum. In the course of our 
investigation we shall learn the reason why this rapidity is at 
present maintained near its highest possible rate (291). 

Regarding the volume of traffic, Newcomb argues in brief 
as f oUowff: 

The societary circulation, or volume of traffic K, depends 
upon the volume of production, which, in turn, is limited by 

"Newcomb, p. 342. ^ lUd., p. 324. 

10 



146 FUNDAMENTAL CONCEPTS [120 

the increasing irksomeness of work as the daily time of labor 
is increased,^® 

At a later point he remarks in this connection : 

As a general rule the actual exchanges will not vary rapidly so 
long as things go on in their regular way. ... As already shown, 
there is a certain amount of these transactions which is most ad- 
vantageous, and in which everything goes on as nearly as possible to 
every one's satisfaction.^' 

The postulate that the volume of traffic K depends on the 
volume of production requires qualification, inasmuch as traffic 
may increase or decrease independently of the amount of the 
goods that are produced. The same product may be sold 
repeatedly, entailing a corresponding increase of the traffic. 
Through improvements in the arts which bring about a more 
minute specialization in the methods of production, products 
will enter into traffic a greater number of times on their way 
to maturity, and while each transfer in the course of pro- 
duction adds to the volume of that traffic which entails 
monetary circulation, it does not add to the volume of the 
final products (121). Hence there is no superior limit to 
this flow, unless we assume that we have reached the acme 
of industrial progress. Nor is there an inferior limit, for 
we know that during periods of business stagnation, not 
everything is going on to every one's satisfaction, and the 
industrial flow is very much less than what is most desirable 
for the well-being of men. 

It is therefore manifest that there is no valid basis for 
the assumption that the quantities B and K are constant 
terms of the equation and accordingly independent of the 
money volume Y. Nor can the assumption that the price 
level P is dependent on the volume V be logically sustained. 
It is indeed wholly inconsistent with the teachings of the 
same author in an earlier part of his treatise. In the dis- 
cussion of gold money he clearly demonstrates that the value 
of the gold contained in the money is that which imparts 
value to it. In his elaboration of the volume theory he 

«» Cf. Newcomb, p 330. "■' Ibid., p. 342. 



121] MONEY 147 

reaches the conclusion that "paper" money obtains its value 
from a radically different source and that it is the volume of 
currency that determines its value. 

Since it is clearly improper to consider B and E to be con- 
stant factors of the equation stated, and P to be a variable 
factor in it, the conclusions based on these assumptions are 
untenable. 

121. Valid Deductions from Newcomb's Equation. — It is 
to be observed that the volume theory is advanced only in 
discussions of the subject of "paper money," and never when 
standard coin is the theme. The volume theory was probably 
conceived in an effort to account for the fact that the current 
value of credit money exceeds the value of the substance of 
which the tokens are made, and since gold coin does not 
exhibit this feature, there would appear to be no need of 
introducing the volume theory when the value of standard 
money is the subject of discussion. 

But let us examine the effect which a change of the 
volume of gold money has on its value. Suppose that the 
total existing supply of gold for both industrial and monetary 
use be equal to OQ of the diagram Fig. 11, and that the 
portion OF of this gold had been taken for monetary use. 
If the volume of gold money were now to be increased, it 
would be necessary to transfer more gold from the industrial 
to the financial field, increasing the volume of gold money at 
the expense of the stock of gold in the general market. The 
point V would thereby be shifted toward the point Q, and 
the market value of gold would rise, that is to say, the 
general price level would fall, a conclusion which is in direct 
opposition to the volume theory. It therefore follows that 
this theory, if it is at all valid, can apply only to credit 
money. 

The only logical derivations, then, to which Newcomb's 
equation lends itself, are the following : 

Any increase of the volume of credit money will, if any- 
thing, increase the demand for gold, because of the greater 
quantity of the metal required in reserve. This increase of 
demand would naturally cause an increase in the value of 



148 FUNDAMENTAL CONCEPTS [121 

gold, which means, of course, a fall in the general price level, 
instead of the rise that should take place according to the 
volume theory (239). 

It may, however, be tentatively assumed that this influ- 
ence is negligible and that the value of the precious metals 
remains unaffected by changes in the volume of credit money. 
The factor P of the equation remains accordingly constant, 
and if the volume V is changed, only the factors B and E can 
respond to such change. 

Let us suppose, to begin with, that the volume V is in- 
creased. The price level P remaining practically unchanged, 
the result will be a decrease of the rapidity of circulation R, 
or an increase of the traffic E, or both. If the flow E is not 
increased, then there will be more money for the same amount 
of business; every dollar will have less work to do and will 
not go round so fast. But if the traffic is increased — which 
does not necessarily imply an increase of the products taking 
part in the flow, as it may also be due to multiplied transfers 
in the course of increased specialization in production (120) 
— the rapidity R may remain the same as before. 

Let us suppose that on the other hand the volume V is 
reduced. This would have the effect of either increasing the 
rapidity R or of reducing the traffic E. 

But the rapidity of the monetary circulation cannot be 
materially increased, inasmuch as under existing conditions 
it is always at or near its practical maximum (291). There- 
fore the only result which would follow a reduction of the 
volume V would be a corresponding reduction of the flow E, 
in other words, a cutting down of the amount of business. We 
have indeed ample evidence on every side that, whatever the 
volume of traffic may be, it is rarely, if ever, up to the existing 
capacity of production. Not only are producers constantly 
seeking new markets for their surplus products and clamoring 
for protection of the home market against outside competition, 
but a condition of enforced idleness among producers is fre- 
quently manifest. The most significant conclusion derivable 
from Newcomb's equation is that a restriction of the volume 
of money, instead of preventing an inflation of prices, really 



122] MONEY 149 

prevents an expansion of business, and this conclusion will 
find confirmation from other points of view further on in our 
discussion (270). 

The equation of industrial and monetary circulation mani- 
festly fails to prove that prices rise or fall in the proportion in 
which the volume of money is increased or reduced. 

122. The Volume Theory in the Light of History. — From 
a purely theoretical standpoint the volume theory clearly 
lacks proof. But it may perhaps appear to be substantiated 
by experience, by history, by facts. The question to be de- 
termined is this: Is there, or has there been, a "money unit" 
which differs in value from the adopted "commodity unit?" 
With reference to standard money this question takes the form : 
Can the value of standard coin fall below or rise above the 
value of the metal it contains ? And with reference to credit 
money it takes this form : Can a money token redeemable in a 
stated amount of gold have a value different from that amount 
of gold? In short, can a "dollar" be anything else than the 
stated amount of the standard commodity ? 

Let us test this question in the light of history. 

Since the resumption of specie payment in 1879 the value 
of one dollar of currency and the value of 23.22 grains of 
pure gold have remained equal. The trifling fluctuation of 
gold in the London market, in which the value of gold bullion 
is never above the value of the coined metal, does not prove 
the contrary, for reasons presented before (109). There can 
be no doubt that the value of the metal gold follows the same 
law of supply and demand that determines the value of other 
commodities, and if the value of the dollar were determined, 
not by supply and demand of gold, but by supply and demand 
of money, the continued parity above noted, notwithstanding 
the fluctuations to which both are constantly subject, would cer- 
tainly be a case of most remarkable coincidence. 

However, this continued parity of currency with gold is 
held to be explained on the basis of the volume theory as 
f oUows : 

Suppose that in a country in which the amount of money 
required by its commerce is fuUy supplied by standard coin, 



150 FUNDAMENTAL CONCEPTS [122 

a certain amount were added to the currency in the form of 
paper money. The volume of money being thereby increased, 
the value of the dollar would be correspondingly reduced. The 
value of the coined metal, in its capacity as money, being then 
less than the value of the same metal as a commodity, coin 
would be withdrawn from circulation and the gold turned into 
the market as merchandise. As the volume of money would 
thereby be reduced, the original value of the dollar would be 
restored as soon as the amount of coin withdrawn would equal 
the amount of paper money previously added, and, for the 
time being, a further diversion of the coined gold into the 
industrial market would come to a stop. 

Each new addition of paper money would have a like effect, 
until all gold is displaced by an equal amount of paper money. 
Should the infiltration of paper money into the system of cur- 
rency be still further continued, one of two things would 
happen. If the notes were of the redeemable kind, their re- 
duced value for money purposes would result in notes being 
presented for redemption, and in the gold so obtained being 
diverted into the market where its value is greater. Hence 
there would again follow a reduction of the volume of currency 
to the original amount, namely the amount required by the 
commerce of the country. But if the notes should be of the 
inconvertible kind, the depreciation of the dollar due to the 
increased volume of currency would persist; in other words, 
prices, in obedience to the volume theory, would permanently 
rise.^^ 

This argument is put forth to elucidate how it is that, so 
long as there is no excessive issue of "inconvertible" notes, 
the dollar of currency is maintained at parity with 23.22 
grains of pure gold, notwithstanding that the value of gold is 
determined by its own supply and demand, while that of the 
dollar is determined by the supply and demand of money. It 
is averred that whenever the value of the doUar of money 
rises above the value of 23.22 grains of gold, it would become 
profitable to convert gold into money by bringing it to the 

=" Cf. Mill, II, p. 89 ff., and Neweomb, pp. 413 ff. 



123] MONEY 151 

mint, until the resulting reaction would restore parity. And 
whenever the value of the dollar of money were to fall below 
the value of 23.22 grains of gold, a melting down of coin would 
ensue until parity is restored. 

123. The Volume Theory Inconsistent With Facts. — The 
above account of what happens when ' ' paper money ' ' is added 
to the existing currency is not in accord with experience. The 
market price of gold bullion, if it differs at all from the coin- 
age value of gold, is invariably below, but never above the 
latter (109). The assumption that the value of standard coin 
can fall below the market value of gold is totally unwarranted. 
A general disposition to melt down standard coin has never 
been observed to attend the issue of redeemable paper money. 
Coin has disappeared from circulation only when paper money 
was put out without provision for its redemption, resulting in 
its depreciation. And under these circumstances the coin did 
not disappear gradually, as more paper money was being 
issued, but practically all at once. The reason is obvious. 
When debtors are free to pay their debts in any of several 
ways, they naturally choose the easiest (112). Hence only the 
least valuable, the depreciated currency, remains in circulation. 
The oft-quoted and frequently misapplied "Gresham law" is 
really a formulation of the fact that debtors naturally select 
the easiest mode of payment, if they have the legal right to pay 
their debts in more than one way. 

If it were true that the purchasing power of the dollar de- 
pended upon the demand for and the supply of money, there 
would be no need for adopting a value unit consisting of 
either gold or silver.^^ We know, however, that every unit, 
whatever its origin, whether the outgrowth of custom, the 
result of convention, or the edict of authority, must be some- 
thing more substantial than a mere name and must somehow 
and somewhere have its magnitude definitely and authorita- 
tively recorded in order that it may serve its purpose. But 
according to the volume theory the measure of the unit of 

^ This corollary of the volume theory has been made the basis of 
many schemes of fiat money, some of which, as history records, have 
been put in practice with disastrous consequences. 



152 FUNDAMENTAL CONCEPTS [123 

value automatically adapts itself to circumstances, and this is 
unreasonable on its face. And, moreover, that theory sug- 
gests nothing to throw light on the source of the value of 
paper money which, so far as it exists, must be traceable to 
wealth held by some debtor (68-69, 92). It is no more reason- 
able to assume that value can be infused into paper money 
merely by the need for a medium of exchange, than it would 
be to suppose that utility can be developed in nature's raw 
products by the mere need of men for useful things. Paper 
money cannot acquire its value from the coin it displaces, for 
the metal of coins so displaced goes back into the industrial 
market and does not, like that underlying gold certificates, 
remain segregated as a pledge of the paper money. 

The idea that paper money can have a value apart from 
the wealth or credit which underlies it is quite on a par with 
MacLeod's notion that wealth is created whenever a credit 
instrument is issued ; but, as we have seen (70) , this assumption 
is unreasonable. 

The volume theory can be scrutinized from another point 
of view. If the value of money is now inversely proportional 
to its volume, it must be possible to show how and when that 
relation was first developed. Our review of the evolution of 
money (107) is in every way borne out by historical records 
which show that in the early stages of that evolution the 
value of money was neither more nor less than the value of 
the commodity used as money. And when paper money, such 
as the certificates of the goldsmiths, came to take the place 
of the commodities previously in use, the value of that money 
was still dependent on the value of the commodity to which 
those paper tokens conveyed a claim. The collapse of so many 
historic schemes of credit money was invariably due to the 
failure of the issuers to recognize the money tokens as acknowl- 
edgments of debt which must be directly or indirectly redeem- 
able in actual wealth or valuable services and which, in order 
that redemption be assured, must be fully secured by wealth 
possessed by the issuer. 

If it were true that the value of money is now determined 
in some other way, there must have been some time when the 



l£4] MONEY 153 

remarkable change took place by which the value of money, 
instead of being dependent on the value of the metal of which 
it was composed, or of the wealth in which it was redeemable, 
became dependent on the amount of money in circulation. 
When did money cease to be either an already existing com- 
modity used as a go-between, or a certificate conveying a claim 
against its issuer ? At what point of its historic evolution did 
money become a specific commodity, the value of which was 
regulated by the supply of and the demand for a medium of 
exchange? Unless it can be shown how and when this meta- 
morphosis took place, we must conclude that the volume theory 
of the value of money has neither an economic nor an historic 
basis. 

The notion that the value of the "money unit" depends 
upon supply and demand of money is clearly traceable to a 
misinterpretation of the so-called "law of supply and de- 
mand," the very name of which is misleading (63). 

124. Seeming Confirmations of the Volume Theory. — 
Whenever credit currency is in circulation at a depreciated 
value by reason of the deficient credit of the issuing power, it 
is easy to see that an increase of its volume will be followed 
by a further depreciation (239). Kepeated experiences of 
this kind have conclusively proven the dependence of the 
value of such money on its volume. It is therefore not diffi- 
cult to understand how men like Hume, Ricardo, Mill, New- 
comb, and many others, who lived during times of such ex- 
periences, should have regarded the volume of money as one 
of the determinating factors of its value. They simply at- 
tributed the rise of prices following an increased issue of 
such notes to an increase of the volume of money as such, 
when it was really due to an increase of the volume of money 
tokens without a corresponding addition to the money sub- 
stance. The result of such issue is simply that the same 
amount of the substance is spread out among a greater number 
of claimants for it. They mistook an increase of money tokens 
for an increase of money substance. 

In further support of the volume theory the fact is often 
cited that prices have risen whenever the quantity of the 



154 FUNDAMENTAL CONCEPTS [125 

precious metals in the markets of the world suddenly in- 
creased. Thus the epoch following the discovery of America, 
when large quantities of gold and silver were brought to 
Spain from the new world, and that following the discovery 
of gold in California, were characterized by a general rise in 
prices. But these facts are in harmony with the commodity 
theory of the value of money and cannot, therefore, be cited 
as demonstrating the volume theory in particular. 

125. Minor Discrepancies of the Volume Theory. — In 
addition to the points already presented there are still other 
reasons which can be adduced to show the unsoundness of the 
volume theory. With the mention of a few of them we shall 
conclude the discussion of this subject. 

If the value of currency tokens were in reality due to 
their usefulness as a medium of exchange, there would mani- 
festly be no need to make any of the tokens of a precious 
metal. Since nevertheless some of those tokens are made of 
gold, these would naturally have a higher value than those 
made of baser metal, for the same reason that a watch case of 
gold, although no more useful than one of brass, yet has a 
higher value. 

Furthermore, when business becomes stagnated and traffic 
reduced, there is, according to the logic of the volume theory, 
a reduced demand for money. This would cause a fall in the 
value of money, that is, a rise in prices. But it is known from 
experience that the reverse is the case. 

If it were true that the changes in the purchasing power of 
the dollar depend on nothing but the three factors : volume of 
money, volume of traffic and rapidity of circulation, so that 
the existing volume of money, through changes of the price 
level, always sufficed to meet the requirements of the entire 
traffic, in other words, if it were true that in the equation : 

the factor P always automatically adjusted itself to the other 
three factors, the supply of money could never fall short of 
the demand. But it is well known that during periods of 
financial stringency the supply of money is decidedly below 



125] MONEY 155 

the demand, showing that, as a matter of fact, the price level 
does not adapt itself to the needs of commerce and that at 
times the demand for money to balance accounts arising from 
the preceding "industrial flow" goes far beyond the supply 
of money (239). The very fact that there are financial crises 
disproves the volume theory. 

It is remarkable that this untenable doctrine still exerts so 
potent an influence on monetary policy. It is not that coin 
and certain credits have value because they are used as a 
medium of exchange, but, on the contrary, they are usable as 
a medium of exchange because they have value. Money does 
not owe its value to the demand for a medium of exchange, nor 
to any law authorizing the issue of such medium, but ex- 
clusively to the value of that of which the money consists, be 
it the standard commodity gold, or credit expressed in terms 
of that commodity (69, 107). 



PART II 

DISTRIBUTION OF WEALTH 



CHAPTER YII 

THE PROCESS OF APPORTIONMENT 

126. Statement of the Problem. — In primitive society, 
where each man produces that which he consumes, there is 
no need for any apportionment; and where cooperative pro- 
duction exists only in the crudest forms, the fruit of labor can 
usually be shared directly among those who have helped. But 
where the processes of industry and commerce are specialized, 
the division of the value produced among the various producers 
becomes more complicated. To be sure, the method of ap- 
portionment is simple enough, for it consists in selling the 
things produced and sharing the proceeds of the sale, but how 
the various shares are determined is the question now before us. 

In the modern system of production labor is specialized to 
such an extent that, as a rule, any one individual performs 
only a small part of the work necessary to produce a given 
thing. The labor of many enters into the production of almost 
every article, and the recompense of all those so contributing 
must, in the last analysis, be derived from the returns received 
from the consumer of the final product. While the portion 
accruing from any one article to any one of the contributors 
may be very small, the volume of production readily accounts 
for the aggregate income of each producer. 

If we were to attempt to trace the currents of the distribu- 
tion in detail, we would soon be lost in a bewildering maze of 
ramifications. But through it all there are apparently at work 
some dominant economic forces that regulate the apportion- 
ment, and it remains for us to study the actions, reactions and 
interactions of these forces as they come into play in the course 
of the process of production and the division of the products. 

127. Modern Industrial Methods. — In the processes of 
production practically all goods pass through a series of inter- 
mediate stages between the natural state of the materials and 
that of the finished products, in each of which the products 

159 



160 DISTRIBUTION OF WEALTH [127 

appear as articles of merchandise, as for instance wool, yam, 
cloth, coats. Each change from one stage to the next is 
effected by effort applied in some special process or operation, 
sometimes performed by a single worker, but more often by a 
group of cooperative workers (211). 

The several processes by which production is accomplished 
may be consecutive or collateral. Consecutive processes may 
be exemplified, in the case of making a coat, by sheep raising, 
shearing, baling of the wool, transporting, spinning, dyeing, 
weaving, sewing and selling. But numerous collateral proc- 
esses are equally necessary. For producing a coat the sewing 
thread, the buttons, the lining are required; the chemicals 
for dyeing must be prepared ; the various machines for baling, 
spinning, weaving and sewing must be built ; means for carry- 
ing the wool to the factory and the cloth to the tailor are also 
necessary. The enumeration of collateral operations might be 
continued almost indefinitely, and every contributing group is 
entitled to its share of the value of the finished product. But 
even so, we have not come to the end of our analysis. As 
already stated, each of these operations is usually effected by 
a group of individuals who work in cooperation toward a com- 
mon iend, each one performing a different task. In these 
groups we find employers and employed, landlords and cap- 
italists, who, together with the contributing groups, obtain 
their respective incomes through the sale of the products and 
the sharing of the proceeds. 

This analysis of the modern system of production suggests 
the line we must pursue in studying the apportionment of in- 
comes. We have to learn how the proceeds from the sale of 
the final products are shared among the several groups which 
perform the various operations of production, and then, how 
these shares are divided within each group among its individual 
members (151, 154). 

In order to clearly understand what it is that determines 
the relation of the respective shares we must first become ac- 
quainted with the several factors of production, with the 
organization of productive groups and with the principal forces 
which come into play. Among the factors of production, 



128. 129] THE PROCESS OF APPORTIONMENT 161 

namely labor and capital, it is particularly the nature and 
function of capital with, which we should make ourselves 
familiar. Since the organization of productive groups should 
here be studied in relation to the distribution of wealth, an 
analysis of that organization may well be preceded by a 
classification of the various shares into which the value of the 
total product is divided. A subsequent study of the forces 
which, as factors of competition, are active in governing the 
division of that value will prepare the ground for a clear 
understanding of the processes through which that division is 
effected. 

128. The Factors of Production. — Labor is the only active 
factor in the process of production, but it is quite generally 
held that land, capital goods and money are to be classed as 
productive factors, especially as it is known that, like labor, 
they command a share of the value produced. There are, how- 
ever, some writers who argue that since land furnishes gratui- 
tously the material for all our wealth, and capital goods are 
the result of labor applied to land, labor should be the only 
factor recognized as a productive agent. In view of this con- 
troversy regarding the respective functions of land, capital 
goods and money in the process of production, the nature and 
function of these factors should be subjected to full ex- 
amination. 

129. What is Capital? — For the purpose of learning the 
precise nature of the service which capital renders in the 
processes of production and for which it obtains a share of 
the product, we must get a clear idea of what is to be defined 
as "capital." 

As popularly applied, this term has remained compara- 
tively free from ambiguity. It is only at the hands of academic 
analysts that different meanings have been attached to the 
term. In business parlance capital is that portion of wealth 
which is employed in the processes of production and exchange 
and so "earns" a revenue. Through being utilized by a group 
of workers, wealth renders a service for which it obtains a 
11 



162 DISTRIBUTION OF WEALTH [iso 

return, and it is this apparent earning power which dis- 
tinguishes "capital" from mere wealth (267, 319). 

This conception of ' ' capital ' ' is embraced in the definitions 
advanced by Adam Smith and by Jean Baptiste Say. Accord- 
ing to Smith, capital is that part of a man's wealth which he 
expects to afford him a revenue. Say considers the term to 
embrace all pre-existing requisites to production. 

130. Land, a Form of Capital. — After Eicardo had pro- 
mulgated his law of rent (172), some writers thought it de- 
sirable to exclude land from the compass of the term ' ' capital. ' ' 
It appeared that the line of reasoning by which the power of 
land to return rent was explained was not applicable to explain 
the power of other forms of wealth to return revenue. This 
led John Stuart Mill to confine the term to that portion of the 
accumulated produce of labor which is utilized for further 
production.*** "When capital is so defined, land is obviously 
excluded, not being a product of labor. 

This constitutes a departure from the popular conception 
of the word. The capital of a miuing corporation, or of a 
railway company, or, indeed, of any business concern owning 
real estate, includes land as well as all other forms of capital 
owned by the company. But Mill evidently recognized that 
the "capital" of the business world contains various classes 
of things that are economically heterogeneous, and he thought 
it proper to separate them so as to clear the field for a theory 
that was to account for interest. 

However, this definition did not seem to satisfy him, for 
he qualifies and modifies it by copious illustrations and finally 
concludes : 

All funds from which the possessor derives an income, which in- 
come he can use without sinking and dissipating the fund itself, are to 
him equivalent to capital." 

This conception of capital is manifestly at variance with 
Mill's primary definition, for funds can be invested in land 
as well as in other ways. It appears that he could not divest 
himself of the conviction that the faculty of wealth to earn 
a revenue is that which makes it "capital." 

«C/. Mill, I, p. 83. *^Ibid., 1, p. 89. 



131. 132] THE PROCESS OF APPORTIONMENT 163 

But with land excluded from the category of "capital,'* 
the term still denotes two different classes of things, namely- 
capital goods and money (134, 203). The essential difference 
between the two latter is seldom given due consideration, it 
being generally held that money commands interest because 
capital goods, obtainable for the money, afford a revenue 
(138), Mobile in reality the interest commanding power of 
money has an independent origin (188, 209-210). 

131. The Three Forms of Capital. — The reason above ad- 
duced for excluding land from the category of capital can 
hardly justify a departure from the current popular usage. 
We shall therefore adopt the customary way of considering 
land as being, like all other wealth that returns a revenue, a 
form of capital; but at the same time we must not lose sight 
of what this entails, namely that ' ' capital, ' ' under this defini- 
tion, includes three classes of wealth, each of which must be 
considered separately when their faculty to yield revenue is 
to be analyzed. They are land, capital goods and money, the 
revenue derived from them being distinguished as rent, capital 
returns and money interest. Revenue-yielding rights, like 
franchises and certain monopolies, are generally classed as 
part of the capital of a business organization, but as we shall 
later make a special study of this kind of capital, we shall for 
the present leave it out of consideration. 

These three forms of capital, though deriving in totally 
different ways their power to afford a revenue, are neverthe- 
less closely related, as is indicated by the fact that the rate of 
net returns from land, from capital goods and from money is 
practically the same. It is for this reason that these three 
forms of wealth may logically be classed as "capital." 

In studying the way in which each of these forms obtains 
its power to command a revenue, we must accordingly seek 
not only for the origin of that power, but also for the reason 
why the rate of net returns from all of the three forms is the 
same (181, 185, 258, 267). 

132. Classification of Capital Goods. — The second form 
of capital, namely capital goods, may be subdivided into two 
classes. These are things in course of production and things 
which are means of production (152, 186). The customary 



164 DISTRIBUTION OF WEALTH [133 

division into "floating" and "fixed" capital is confusing, 
since floating capital is considered to include not only goods 
in course of production, but also money, and money cannot 
properly be classed as capital goods. 

In this classification goods in course of production embrace 
such things as iron while being shaped into a loom, or yarns 
while being woven into cloth. Their value increases during 
the operation. Among means of production are classed the 
things which are being used in the process without becoming 
bodily incorporated in the product, like the building and 
equipment of a factory, the coal, gas, oil, and so forth, used 
in running the plant. The value of these constantly diminishes 
or entirely disappears. But the value so disappearing from 
the means of production is not lost, for it is imparted to the 
things in course of production, so that the collective value of 
means and products actually increases as the work proceeds 
(133). It has already been pointed out (10) how the po- 
tential utilities with which means of production have been 
invested by past labor are converted into actual utilities of 
the goods that are being advanced to completion. Figuratively 
speaking, goods in course of production absorb not only the 
labor applied to them, but also a portion of the labor previously 
spent in the making of the means of production. The cloth 
is the result, not only of the labor that produced the yarns 
and the labor necessary to change these into cloth, but also of 
a share of the labor spent in erecting the factory building, in 
constructing the machines, and in producing all other sup- 
plies required for carrying on the business. For the same 
reason that yams are considered to be garments in course of 
production, a loom on which the cloth for, say 50,000 suits of 
clothes can be woven should be viewed as 50,000 suits of 
clothes in a partly finished state. 

Capital goods, in whatever form they may be, are, accord- 
ingly, immature goods, namely goods which are the embodi- 
ment of past labor, to be utilized, through future labor, for 
producing consumable commodities (191). 

133. Active and Idle Capital. — It goes without saying that 
land can return rent only while in use, and that capital goods 



133] THE PROCESS OF APPORTIONMENT 165 

will yield a revenue only while being forwarded toward ma- 
turity. If they are allowed to remain unused, the ''services" 
for which rent and capital returns are held to be due are not 
rendered, and these incomes do not accrue. 

As a rule, capital goods are in use only while labor is being 
applied to them in the process of production. This, however, 
is true only in a general way. In the production of many 
things there are periods when active operations must cease in 
order that the process may take its proper course. Wine is 
stored for years for the purpose of ageing. Agricultural 
produce in course of cultivation can be worked upon only at 
varying intervals, and after harvesting some of it must be 
kept in store so as to be available in the interval between 
seasons. Manufactured goods remain in store for a certain 
average time before they reach the consumer. During these 
periods all these various things are actually undergoing ad- 
vancement toward ultimate use. 

During the entire period required for production the things 
that are being forwarded toward consumption gradually in- 
crease in value. According to experience this growth of 
value is ordinarily such that, after the labor applied is re- 
quited, a difference still remains which in general is pro- 
portionate to the amount of capital and to the time during 
which this capital is employed (203). This remainder is the 
compensation that goes to capital. Only when interruptions 
occur in the maturing process, or when the time of this process 
is uselessly prolonged, does capital cease to get a return. 
Capital is thus recognized in two states of existence; in the 
one case as live, employed or active capital, in the other as 
dead, unemployed or idle capital. 

In the usual course of affairs the purpose of acquiring 
capital goods is to "employ" them by advancing their unripe 
utilities toward maturity. The cloth manufacturer buys looms, 
yams and other supplies to the end of producing cloth. The 
merchant buys this cloth in order to retail it to his customers, 
and when he sells it, it is economically advanced by his effort 
and is greater in value than when he bought it. At each suc- 
cessive transfer capital goods appear in a more advanced stage 



166 DISTRIBUTION OF WEALTH [134 

and possess a higher value (132), until, at the last exchange, 
they pass into the hands of the consumer as final products at 
their ultimate value. 

134. Money is Always Idle Capital. — In this very respect 
money differs absolutely from capital goods (130). Money 
does not undergo any transformation between exchanges (203). 
It remains unaltered, both in its economic condition and in its 
value expressed in terms of the value unit, and for this, if for 
no other reason, must not be confused with capital goods. It 
would in fact be worthless as a medium of exchange if it were 
otherwise. The gold which forms the reserves of banks and 
of the world's treasuries is locked up in vaults, thus being held 
from industrial fields where it could be utilized like other com- 
modities. Unlike the value of capital goods, that of money 
cannot be increased by either being worked upon or put in 
store ; it cannot bring a revenue to its actual possessor. Con- 
sidered in this light, all money is manifestly idle capital, and 
as such must be distinguished from capital goods, if the in- 
vestigation of the cause that gives to money the power to 
command interest is to be intelligently pursued. 

This distinction has been clearly recognized by many 
writers who, however, have failed to realize that for this reason 
money is a kind of capital which is radically different in its 
economic aspects from capital goods (188, 267). 

According to Adam Smith : 

Money, the great wheel of circulation, the great instrument of 
commerce, like all other instruments of trade, though it makes a part, 
and a very valuable part, of the capital, makes no part of the revenue 
of the society to which it belongs." 

John Stuart MiU says : 

Money cannot in itself perform any part of the office of capital, 
since it can afford no assistance to production.'" 

According to A, F. Walker: 

It is true that money does not beget money, but capital does 
manifestly beget capital." 

** Smith, p. 220. " Mill, I, p. 83. ** Walker, p. fi6. 



135] THE PROCESS OF APPORTIONMENT 167 

Simon Newcomb asserts: 

The money serves the banker no useful purpose until he passes it 
to someone else, perhaps a customer. Everyone into whose hands it 
falls must be paying or losing interest on it while he keeps it, and he 
cannot gain the interest until he purchases an ownership in some form 
of actual capital.'" 

It is evident that these authorities clearly perceived the dis- 
tinction between money and actual capital or capital goods. 
Nevertheless, when they come to examine the nature of in- 
terest on money loans, they quite overlook the significance of 
the distinction which they so clearly point out (210) . 

135. The Conception of Capital as a " Fund."— The fact 
that capital returns a revenue has led to the conclusion that 
capital has not only the faculty of maintaining itself, but has ac- 
tually a power of increase. This proposition is, however, clearly 
inapplicable to the individual things of which the capital of 
a productive group consists. Thus, for instance, the buildings 
and equipments of a factory do not increase in value ; on the 
contrary, they constantly deteriorate and accordingly become 
less valuable. When the power of capital to increase is in 
question, the term ''capital" can have reference only to the 
things that collectively make up the capital of a productive 
group. This has given rise to lengthy dissertations on the 
discrimination that should be made between capital considered 
in a " concrete ' ' and capital considered in an " abstract ' ' sense, 
or, more correctly, between capital goods as such and capital 
considered as a "fund." In colloquial language the term 
capital is indeed used in both senses, and it may be of ad- 
vantage to point out the difference so as to prepare the reader 
to avoid misunderstandings by confusing the two concepts. 

Even when considered as a fund, it is clear that capital 
must at any moment consist of certain definite and tangible 
things. The designation "abstract" is therefore inappro- 
priate. There is no difference, at any given moment, between 
capital viewed as a fund and the things constituting that 
capital, except as a matter of dialectics. A certain fund may 

^Newcomb, p. 396, 



168 DISTRIBUTION OF WEALTH [135 

at a given time be invested in a cloth factory and thus mo- 
mentarily consist of the factory building, the looms, the yams. 
But at another time it may be invested otherwise and yet be 
the same fund. A difference between the two ideas appears 
only when the identity of a given capital, in the course of its 
existence, is followed up either in a physical or in an economic 
sense. 

Suppose a man owning a ranch stocked with cattle wishes 
to dispose of it and to invest, instead, in the fruit trade, a 
steamer engaged in that enterprise having been offered him. 
He finds a purchaser for his ranch and, with the money so 
obtained, he buys the steamer and engages in the fruit trade. 
We are here dealing with three quantities of capital of equal 
value: (1) a cattle ranch, (2) a sum of money, and (3) a 
fruit-laden ship. Viewed in a physical sense, each of these 
three aggregates of wealth has its independent existence. The 
ranch, the sum of money and the vessel remain a ranch, a sum 
of money and a vessel, irrespective of who owns them. 

But now suppose the ranchman views his possessions as a 
fund. On the first day his capital consisted of a stocked ranch. 
On the second day he possesses in its place a certain sum of 
money. The third day finds him the owner of a ship. His 
fund of capital was twice converted. In the end the fruit 
vessel is to him the same fund that originally existed in the 
form of the ranch, only differently embodied. 

Or let us consider a cloth manufacturer whose factory is 
stocked with the necessary machines, yarns and other supplies, 
and who has an adequate bank account, all of which together 
constitute his capital. A week later we find the yarns turned 
into cloth and the bank account exhausted by the payment of 
wages. In the place of yarns and bank balance the manu- 
facturer possesses cloth. Upon selling this, he applies the 
proceeds to buy more yarns and to replenish his bank account, 
probably finding that he has made some profit. 

Viewing the various things in their physical aspect, we 
observe the yarns converted into cloth and the money passed 
out into circulation by the payment of wages. Then we see 
the cloth sold for other money, some of which is passed out in 



135] THE PROCESS OF APPORTIONMENT 169 

buying a new stock of yarns. The manufacturer parts with 
some capital goods and acquires others; he pays out some 
money and receives other money. 

When capital is viewed as a fund, its physical composition 
may undergo a radical change from time to time, either by 
way of exchange, as in the case of the rancher, or partly 
through productive processes and partly through exchange, as 
in the case of the cloth manufacturer. The physical identity 
is lost, but the fund is economically identified from day to 
day by the fact that in the course of production and exchange 
the things constituting it have taken the place of the things 
of which it consisted before. In the rancher's fund the ship 
took the place of the ranch, yet it is the same fund it was 
before; it is still his "capital." To the cloth manufacturer 
the cloth at the end of the week is the embodiment of the same 
fund which at the beginning consisted of yarns and a certain 
bank account. And after selling the cloth and buying a fresh 
stock of yarns, he may find his bank account to exceed that 
which he had at first; his fund of capital grew as a flock of 
sheep might have been increased through the birth of a 
number of lambs. 

We know from experience that capital invested in pro- 
duction and commerce ordinarily does increase in this manner, 
or, as would appear, "earns" a revenue. In various writings 
J. B. Clark points to the fact that means of production, when 
in use, lose in value, while at the same time their owner 
reaps a profit from them, and that accordingly this profit is 
yielded, not by capital goods, but by capital viewed in the 
abstract sense. He therefore concludes that the problem of 
interest can find its solution only by tracing the relation of 
capital, considered as a fund, to the process of production, and 
that interest consist of the earnings of the instrument 
procured by the employer with the final increment of bor- 
rowed capital. But a brief survey of the subject makes it 
clear that the interest problem is not different whether capital 
is considered in the concrete or in the abstract sense. In either 
case the tangible wealth involved must be considered in the 
aggregate. In the process of production the goods that are 



170 DISTRIBUTION OF WEALTH [136. 137 

being advanced toward maturity increase in value while the 
means of production depreciate, and the increase in value of 
the former exceeds the loss in value of the latter so much that 
the combined value shows an increase. The problem of capital 
interest thus resolves itself into the question: "Why is it that 
the market value of products of labor exceeds the market value 
of materials, incidentals, depreciation of means of production 
and wages; why is it that the value of cloth exceeds the rec- 
ompense of effort plus the outlay for yarns and for the 
maintenance of the plant? 

136. Classification of Incomes. — In the modern system of 
production and distribution not only those who are actively 
engaged, but also the passive participants, those who furnish 
the land and other capital, share in the division of the proceeds. 
Incomes are therefore usually classified as wages, rent and in- 
terest; and to these some students of the subject would add 
business profits. 

This classification of incomes has been handed down to us 
from the earlier economists, but is not as comprehensive as 
it should be. For the purpose of a more thorough examina- 
tion economic returns should primarily be divided into two 
principal forms of income, corresponding to active and passive 
participation of the recipients, the one comprising wages, the 
other profits. 

It is to be observed that these terms are here applied in a 
sense somewhat different from their colloquial meaning. The 
term "wages" is to include all compensation for personal par- 
ticipation in productive effort, and "profits" is used in the 
sense of acquisition without such effort. 

137. Wages and Profits. — The term "wages," as above 
defined, embraces every recompense for labor, whether physical 
or mental, direct or indirect. It includes all that a person 
obtains by useful work, whether he works alone or in company 
with others, whether he is employer or employed, artisan or 
merchant, la^^yer or teacher. It is not restricted to what we 
customarily term Avages, that is, the stipend allotted to manual 
labor; it embraces also salaries, commissions, fees, and espe- 



138] THE PROCESS OF APPORTIONMENT 171 

cially that which is so often erroneously called profit, namely 
the recompense for personal services rendered by the self- 
employing artisan, the manufacturer, the merchant, the trader, 
the inventor. ''Profits," on the other hand, are the acquisi- 
tions obtained in all other ways. 

The merchant sometimes calls the excess of the retail over 
the wholesale price of his goods his profit. But from that 
excess he must defray the expenses incident to his business 
and, in addition, must obtain something for his own work, 
namely his own wages; hence we must avoid considering 
* ' profit ' ' in this broad sense. Some writers, on the other hand, 
use the term to designate only the remainder of income after 
the deduction of all outlays and charges, including those for 
the use of capital and land. In the following pages ' ' profits ' ' 
are to be understood as excluding all forms of compensation 
for personal participation and as including all other forms of 
income, particularly rent of land, capital returns and interest 
for money. 

Considered in this light, wages are the recompense for 
active assistance in production, for "personal" services, while 
profits are the returns for passive participation, or for what 
may be termed ' ' impersonal ' ' services. The service for which 
wages accrue can be rendered only by personal participation, 
while that for which profits accrue does not require personal 
collaboration. The absence of the personal element is ex- 
emplified notably where profits accrue to impersonal recipients, 
such as endowed institutions and trust estates. 

138. Classification of Profits. — There are two distinct 
kinds of profits; the first kind are capital profits which are 
practically continuous or regularly recurring, while the second 
are chance profits, which are irregular and uncertain. Capital 
profits are derived from the ownership of land, of capital 
goods, of money and of franchises, and are, respectively, rent 
of land, returns of capital goods, interest on money and in- 
come from franchises. Chance profits arise from fluctuation 
of prices, from incidental or accidental departures from the 
average condition of affairs and from gambling in any of its 
forms; and they are likely to alternate with losses of like 



172 DISTRIBUTION OF WEALTH [139 

nature (224), in other words, they may be negative as well' as 
positive. 

In the usual way of accounting for money interest a re- 
lation between it and capital returns is assumed which does 
not exist (130) , It is generally held that the income which we 
here designate as capital returns or capital interest is identical 
with money interest, on the ground that the lender of the 
money is virtually the lender of the capital goods obtained for 
it. We shall find later (209-210) that this view is untenable, 
and that it is necessary to distinguish capital interest from 
money interest and to deal with them separately in our analysis 
(188). 

The various forms of income can accordingly be tabulated 
as follows (168): 

f Waeea [Rent of Land. 

Incomes.... J ^ ' f rnnital Profits J ^^P^*^' ^'^^^^^^*- 

1 Profits I *-aP"^^ ±^onts. < ^^^^^ interest. 

(Chance Profits. Uncomes from Franchises. 

139. Gross Profits of Capital. — In common parlance the 
term ''rent" means the stipulated charge for the lease of 
houses or of land, and "interest" means the stated charge for 
the loan of money. But if these stipulated charges are an- 
alyzed, they are found to be made up of several items, each 
of which is compensation for a different economic service. To 
avoid confusion, the common meanings of the above terms have 
been abandoned and the terms defined so that each shall be 
related to a separate cause. In discussions of economic topics 
the terms rent and interest are accordingly used in a more 
restricted sense. But as in our discussions we shall frequently 
have occasion to refer to economic rent and pure interest, and 
also to stipulated or gross rent and interest, we shall mark 
the distinction by these designations. 

The rent agreed upon for the lease of a farm, for instance, 
depends not only on the location of the farm and the fertility 
of its soil, but also on the cost of repairs which the landlord is 
to make, on taxes levied on improvements, on the rate of in- 
terest as it applies to the value of the farm house or other 
improvements, and on other incidentals. But considered as a 



139] THE PROCESS OF APPORTIONMENT 173 

simple economic return, ''rent" must be understood as mean- 
ing only those profits of the utilization of land which are 
derived from its inherent qualities, namely its location, its 
fertility and its other natural endowments (171). 

We shall find that the profit derived from the use of these 
qualities, that is, the economic rent, while primarily obtained 
by the user of the land, ultimately goes to the owner. If the 
landowner himself is the user, he directly obtains the benefit of 
the rent, but if a renter uses the land, the economic rent figures 
as a part of the stipulated rent paid to the landowner. In gen- 
eral, any excess of the stipulated over the economic rent is due 
to conditions other than the natural endowments of the land, 
chiefly to improvements of whatsoever kind. 

We must here not forget that all our conclusions relate to 
an average of general conditions. In individual cases the rent 
stipulated and agreed upon between owner and tenant may 
differ more or less, one way or the other, from that average. 
These variations must be regarded as being in the nature of 
chance profits or chance losses which are incident to all proc- 
esses of production and exchange and therefore enter as items 
of the gross rent. Such variations of the gross rent as chance 
to be in favor of the landlord are tantamount to chance losses 
by the tenant, and vice versa, of course. 

Inasmuch as these chance departures from average con- 
ditions balance each other in the grand total, they must be 
ignored in the discussion of general economic laws. 

The income from the loan of capital goods is likewise of a 
composite nature. If a pleasure yacht is leased for a longer or 
shorter cruise, or a horse and carriage hired out for a time, 
the stipulated payment covers three separate items. These 
are wages, compensation for depreciation and pure interest, 
which may be detailed as follows : 

When something is leased, the lessor is usually obliged to 
perform some personal services. One portion of the hire con- 
stitutes the wages for such services. It covers the cost of 
cleaning, storing and repairing, of feeding, maintaining and 
housing, etc. 

A second portion is to be accounted for as follows. The 



174 DISTRIBUTION OF WEALTH [139 

thing leased will deteriorate while in use. We know that it 
cannot be utilized forever, but that after a time it will wear 
out beyond repair. Its total capacity to yield services or to 
gratify desires is limited, and a portion of this capacity is 
consumed by the lessee. A lease virtually constitutes a partial 
sale of the total utilities of the object. Each lessee must there- 
fore pay his share, so that by the time the object is worn out, 
taking in account its average duration, its value will have 
been restored to the owner. The second item, then, is com- 
pensation for wear and tear, also known as amortization. This 
portion includes the item of risk of accidental loss, which is 
accounted in the average durability (219). In any specific 
case the actual duration of a thing may be greater or less, but 
profits or losses due to departures from averages are to be 
classed as chance profits (215) and as such may be plus or 
minus. 

The third portion of the stipulated hire is that further 
income, usually designated as interest, which constitutes the 
net return yielded by capital goods. This is the only item 
which constitutes a net income for impersonal services and 
figures as pure capital interest. 

Periodic incomes, such as dividends on capital stock, which 
accrue to the owners of capital goods in use by productive 
groups apart from any personal participation of those owners 
in the active work of the groups, are in the main made up of 
two parts (265a), as foUows: 

First, inasmuch as capital which is in the form of means 
of production will deteriorate through use and so lose in value, 
a portion of the income returned to the furnisher of capital 
must cover this depreciation and also insurance against risk 
of its destruction, partial or complete, by accident or other- 
wise. Of course, if this portion, instead of being included in 
the periodic payments to the owner of the capital, is applied 
to maintain the value of the capital by repair, replacement 
and extraneous insurance, then the item covering depreciation 
will disappear from the periodic returns. 

It should not be overlooked that the item of amortization is 
really a due payment by one group for the using up of 



139] THE PROCESS OF APPORTIONMENT 175 

capital goods that have been produced by, and obtained from, 
other groups. Amortization is therefore merely a payment for 
material in the process of sharing the value of the final 
products among the contributing groups. It cannot be con- 
sidered as value produced by the group which shares it out, 
and is therefore not to be counted as part of the value pro- 
duced by and distributed within the group among its members 
(143, 265&). 

Second, the remainder, in point of fact, a considerable 
portion of the periodic capital returns, is what is known as 
interest yielded by capital goods. It is only this item which 
can be considered as really ' ' capital interest, ' ' 

The periodic returns accruing to money loans, namely gross 
interest, is also of a composite nature, being composed of three 
distinct items (76, 248, 263a). The first of these is recom- 
pense for labor and other costs involved in making and super- 
vising loans. In the case of long-time loans, such as those on 
bonds and mortgages, this item is comparatively small. But 
in loans made by deposit banks it is considerably greater, as it 
must cover the expenses of carrying on the banking business, 
including the work of paying or clearing the checks through 
which commercial payments are effected (263&). 

The second item is insurance against risk. In the case of 
money loans, as distinguished from loans of capital goods, the 
element of deterioration is not present, since the loan must be 
returned by the borrower in the form of money and not in the 
form of a partially worn-out thing. But the element of risk 
of loss through shortcoming of the debtor is generally present 
in a greater or less degree (220), and the stipulated interest 
includes the item of insurance against such loss. It is this 
addition which induces the lender to assume the risk. 

The third of the items which make up the compensation 
for the service of lending money is that which has been dis- 
tinguished as pure interest or interest-proper. This item is the 
net income of the lender, a recompense for strictly impersonal 
services. The origin of the power of money to command this 
recompense will be fully discussed later (241-243). 



176 DISTRIBUTION OF WEALTH [uo 

140. Gross Business Profits. — The classification of the sev- 
eral specific forms of income presented above in tabulated 
form has been made with respect to the services for which 
they are returns. The several forms of income may, however, 
occur in various combinations. A man's actual income may 
be composed of any or all of these specific elemental forms. 
Although in the case of composite incomes it is impossible to 
tell, in dollars and cents, just what portion is due to either 
of the separate kinds of services, nevertheless a dialectic separa- 
tion is not only possible, but even necessary, in order rationally 
to analyze the distribution of incomes. A merchant, for in- 
stance, may be the owner of the lot on which his store is located, 
of the buildings and of all the other capital invested in his 
business. His annual net income will then consist of rent 
accruing through the more or less favorable location of his 
store; of interest returned by his other capital including 
money; of wages for supervising his business (168) ; and also 
of chance profits, which, however, are likely to alternate with 
similar losses. Where the element of monopoly comes into 
play, monopoly profits will also arise, but at the present stage 
of our study this element is assumed to be absent, as it will 
receive special attention later. Mention is sometimes made 
of another form of elemental income, namely "business 
profits," but as there is no form of economic service besides 
those already noted, and as there cannot be an effect without 
a cause, the existence of business profits, except as a com- 
position of two or more of the elementary forms of income 
above enumerated, cannot be assumed. 

That which in business parlance is usually called "profits" 
is, accordingly, composed of a number of items, of which only 
economic rent and pure interest can be specified as capital 
profits. A failure to recognize this has given rise to the notion 
that, as a rule, the rate of capital returns exceeds the rate of 
money interest, in other words, that money, when invested in 
business, generally earns more than when invested in loans, 
and that for this reason the borrowing of money with which to 
obtain capital goods, in other words, to put it in business, is 
profitable to the borrower. But this is true only where the 



141] THE PROCESS OF APPORTIONMENT 177 

chance profits of business exceed the chance losses, which, 
according to the law of probabilities, happens no oftener than 
the reverse. This, of course, means that in the average chance 
profits and losses balance each other, and where there is an 
excess of such profits over losses, the excess must not be re- 
garded as earnings of capital, but merely as incidents of 
chance. Profits of this kind are apt to accrue most frequently 
during periods of general prosperity and are equally apt to 
be wiped out by an excess of chance losses during periods of 
depression. Furthermore, the belief that an excess of capital 
profits over current money interest is the rule seems often 
confirmed by appearances. If a business man is unable to 
fully employ his ability by reason of an insufficient command 
of capital, an increase of such may render his work more 
productive. Additional income from this cause is, however, 
not capital profit, but, on the contrary, labor's earnings or 
wages. When all factors having bearing on the case are 
properly taken into account, it will be found that the average 
rate of returns from capital goods does not exceed the current 
rate of interest on money loans. 

141. Composition of Productive Groups. — The various in- 
comes of individual members of a group are the recompense 
for their respective services. We have therefore next to 
classify the members of the group with respect to the service 
or function performed by each, and unless we go into tech- 
nical details, which for our study is not necessary, the number 
of functions is very limited. 

Inasmuch as a number of individuals are often engaged 
conjointly in performing one and the same function, while, 
on the other hand, one or more of the members of a group 
frequently figure in several capacities, it becomes necessary to 
disregard the persons and to treat only the functions as though 
each were performed by a distinct agent. In other words, we 
must personify the functions. In this way we avoid the con- 
fusion which would ensue if we were to deal with individuals 
in their mixed capacities. 

Following the same line of reasoning that led us to the 
12 



178 DISTRIBUTION OF WEALTH [U2. 143 

classification of incomes, we must separate the agents into two 
divisions, namely active and passive. The active agents are 
those who contribute personal services, while the passive agents 
are those who supply what we have termed impersonal services. 

142. Active Agents. — The active agents in a productive 
group include the director or manager, the foremen and work- 
men, the clerks and salesmen. The manager organizes the 
enterprise, selects the methods of production, controls the 
purchase of the means of production and of the supplies, 
directs the workers and attends to the final disposition of the 
goods produced. The function of management frequently de- 
volves upon a number of individuals, some of whom perform 
their part in the technical, the others in the commercial 
branch of the undertaking. In their combined capacity these 
represent the "manager." The workmen are specialized more 
or less, to suit the nature of the business. In this way the 
active agents are divided into two divisions, manager and 
workmen, though the line of separation is not always sharply 
defined. 

The recompense of the active agents is wages, which may 
take the form of salaries, commissions, royalties, business in- 
comes, or whatsoever may be the form in which personal 
services are compensated. 

143. Passive Agents. — As such must be considered the 
"capitalist" in his various phases and functions. These com- 
prise the ownership of the land and the ownership of the 
capital goods and the working fund in use by the group, and 
also the ownership of any money that may be borrowed by 
the group. In addition to these we shall presently find that 
another function must be recognized as a passive agent, namely 
the "enterpriser" or "venturer" (144). 

The land furnished by its owner may be a manufactur- 
ing site, a farm, a forest, an oyster bed, a mine, a waterfall, 
etc. The service of furnishing the land is compensated by 
rent (325). 

The capital goods furnished by their owner consist of means 
of production, including all improvements on the land utilized, 
and all material of production and the working fund. The 



143] THE PROCESS OF APPORTIONMENT 179 

income from these capital goods, apart from the item of 
amortization (139), is what we have termed capital interest. 
When money is borrowed from a money lender, that lender 
becomes, for the time, a component of the capitalist (347), 
and in this case a portion of the capital returns goes to him in 
the form of money interest. In co-partnerships the function 
of capitalist is exercised in common by the partners. In stock 
companies not only the stockholders, but also the bondholders, 
considered together as a single economic person, constitute 
the capitalist. 

We must here take care not to confuse the ''capitalist" 
in the colloquial with the "capitalist" in the economic sense 
(265a). Where, as frequently happens, the same individual 
is both capitalist and manager, we must distinguish between 
the two functions which he thus fulfils. As capitalist he is an 
investor, and as such receives capital interest; if he owns the 
ground, he is landlord and as such receives rent; and if he 
furnishes money to the enterprise, he is money lender, and as 
such receives money interest. On the other hand, in the capacity 
of organizer or of manager he is not a capitalist, but one of 
the active agents of the group, and his recompense in this 
respect is in the nature of wages. 

But the furnisher of capital fulfils still another function. 
The capital goods are as a rule the products of contributing 
groups, and when the capitalist furnishes them he is really in 
the position of a salesman representing these groups (265&). 
We have seen before that as furnisher of capital goods he 
obtains, generally speaking, two items, namely amortization 
and capital interest, the first of which falls away if the capital 
goods of the group are maintained at full value by repair and 
replacement. 

Let us take at first the case where the capital of a pro- 
ductive group constantly depreciates and where a correspond- 
ing amortization is due to the furnisher of the capital in 
addition to interest. The amortization accrues in the form of 
instalment payments along with other incomes from that 
group, so that by the time the capital is finally used up, the 
entire value has been covered by the amortization items. These 



180 DISTRIBUTION OF WEALTH [144 

items are therefore payments for services received from ex- 
traneous groups and pertain to the apportionment of the gross 
income among those groups. Their recipient is in fact not a 
member of the group to which he has furnished capital. He 
becomes capitalist of that group only through his having to 
wait for those payments while permitting the use of his 
capital by the group before he is paid for it. Thus the item 
of interest accrues to him for the service of conceding the 
use of the capital while it is yet his property. Only in this 
capacity is he member of the group and becomes participant, 
in the sharing of the net income within the group. 

The second case is that in which the amortization items 
are not withdrawn, but are applied to the maintenance of the 
capital by repair, replacement and full insurance against loss 
by accident. This case differs from the first only by an in- 
definite postponement of the payment of the principal. The 
capitalist retains ownership of the undiminished capital fur- 
nished, and he receives only capital interest. Of course, the 
question of chance profits or losses is here not taken into 
account. 

144. The Venturer. — We have already pointed out (61) 
that the normal market value of the products of labor equals 
the cost of their production, if we include in this cost not only 
that of labor, materials and incidentals at their market rates, 
but also all charges for the use of land and of other capital at 
market rates, and finally also the recompense of the employer 's 
or manager's services at their market value. Thus, on an 
average, the gross income of a business which does not enjoy 
any special franchises or other monopoly advantages just 
covers all items of cost. 

In practice, however, the actual income derived by any 
productive group from the sale of its products varies more or 
less from this average. It is sometimes greater, sometimes 
less than this cost, the difference being chance profits, which 
may be plus or minus. In every business these chances must 
be taken by some one who is in position to do so. A business 
man may acquire chance profits in addition to the wages of 
his own labor and the normal profits of the capital he has 



145] THE PROCESS OF APPORTIONMENT 181 

invested; or, on the other hand, he may sustain losses, and it 
may even happen that these are greater than his wages and 
capital profits combined. 

In a complete analysis of the composition of an economic 
group we must therefore recognize, as a member of the group, 
one who assumes the business chances. This particular mem- 
ber we shall designate the "venturer" (143, 219, 224). It is 
true that in actual life this venturer has rarely a separate 
existence, his function being nearly always combined with 
that of either manager or capitalist or with both.^^ 

If we were to single out the venturer as an individual 
divested of other functions, we would have to conceive him as 
one who, while having no capital of his own invested in the 
enterprise and taking no part in its management, is neverthe- 
less its nominal owner. If the undertaking happens to have 
more than the usual degree of success and its income exceeds 
the costs including rent and interest, the excess will go as 
chance profit to the venturer. But if it happens to be un- 
successful and the balance sheet shows losses instead of profits, 
the venturer must make good the loss. 

145. Composite Agents. — We have now classified the ele- 
mentary agents composing a productive group, so as to cor- 
respond with the several elementary forms of individual 
incomes. As already stated, some persons act in several dif- 
ferent capacities, while some functions devolve on a number 
of individuals who are therefore to be considered, in an 
economic sense, as conjointly being a single person. 

Many business men, and especially professional men, com- 
bine the position of manager, workman, landlord, capitalist 
and venturer in their own person. More frequently it hap- 

** The terms " entrepreneur " and " enterpriser " have come into 
use to designate the organizer of an enterprise who also assumes the 
chances of success and failure and who, according to our way of 
analyzing the composition of productive groups, represents two or three 
functions. He is organizer, venturer and usually also capitalist, at 
least in part. We have chosen the term " venturer " in preference to 
" enterpriser " because the function we desire to designate is of an 
absolutely passive nature, while the term enterpriser is suggestive of 
activity and would therefore be apt to mislead the reader. 



182 DISTRIBUTION OF WEALTH [146 

pens that a business man, while manager and venturer, is 
capitalist only in part, he having borrowed part of his work- 
ing capital or rented his place of business. If, in such a 
ease, his debts equal his actual assets, he is not even capitalist 
in any degree. As manager and venturer his income is then 
confined to manager's wages and chance profits or losses, and 
if his business is unprofitable, his income as manager will suffer 
accordingly, for the loss must be made good from it. 

In analyzing stock companies we find the function of 
manager to be held conjointly by the president and the board 
of directors, together with the superintendent, the foremen, 
etc. The "manager" is then a "person" composed of a 
number of individuals. The stockholders and bondholders 
combined constitute the "capitalist," but the function of 
"venturer" is assumed only by the stockholders. The bond- 
holders are part of the capitalist, pure and simple. If the 
company is solvent, they receive the stipulated interest income, 
no more, no less. But the share of the stockholders, taken all 
together, may be greater or less, according as the enterprise 
affords a profit over or under what would be derived from 
the same investment at the current rate of interest. In 
addition to their share as capitalist they come in for chance 
profits or losses, that is, for such balances as may accrue, be 
they plus or minus. Their minus balances may possibly wipe 
out or even exceed the item of normal capital returns, and in 
the event of adversity, they are even liable to the extent of 
the principal of their investment. In the liquidation of a 
stock company all liabilities, including the bondholders ' claims, 
interest as well as principal, must be paid in full before any 
share accrues to the stockholders. In any case, such partici- 
pants as are not included in the capacity of venturer will 
suffer loss only if the total share of those who are so included 
is insufficient to cover the loss. The loss, if such there be, 
falls primarily on those individuals who participate in the 
capacity of venturer, and on those otherwise interested only 
when the loss exceeds the holdings of the former. 

146. The Employer. — We may here add a few words re- 
garding the office assumed by the ' ' employer. ' ' Considered in 



147] THE PROCESS OF APPORTIONMENT 183 

the economic sense, he can easily be conceived apart from the 
function of capitalist. But his position is inseparable from 
either manager or venturer. We shall, for this reason, use 
the term employer as embodying ' these two functions com- 
bined. In this classification the employer as such is in no 
sense capitalist, although in practice he who functionates as 
employer is usually also capitalist (167, 348). 

The fact that the various functions may occur in various 
combinations offers no difficulty in the way of a separate ex- 
amination of each of them in their relation to the process of 
production and the sharing of the value produced. We shall 
follow the classification already indicated, according to which 
the manager, the workman, the landlord, the capitalist and 
the venturer are separate and independent entities. Our pur- 
pose is to find how, and through what causes, the net income 
of the industrial group is divided into wages and profits, and 
how wages as well as profits are further divided and shared 
among the respective members of each group. 

Nominally this division is determined by the employer. To 
all appearances he decides what wages to pay and what grade 
of goods to buy. He pays rent and interest from the funds 
available and fixes the price at which the goods made are to 
be sold. This is, however, only apparently so. As the buyer 
of labor and of the supplies he must come to an agreement 
with the sellers. As a seller of the goods made he must meet 
the views of the buyers. All incomes and all expenditures of 
the group are in the last analysis subject to the law of supply 
and demand, to the inevitable action and reaction of com- 
petition. 

147. Competition, the Controlling Force. — Among the 
forces which are active in determining the shares of the several 
participants in production, competition plays an important 
part. 

There is prevalent a considerable difference of opinion as 
to whether the influence of competition is wholesome or detri- 
mental. While it is largely regarded as having the effect of 
bringing about an equitable distribution of the value produced 
by industry, it is frequently held responsible for the fierce 



184 DISTRIBUTION OF WEALTH [147 

struggle between employers and employed, between capital and 
labor, between the rich and the poor, between the strong and 
the weak, giving an unfair advantage to those endowed with 
wealth or possessed of exceptional ability. This hostile view 
of competition is widespread and has given rise to volumes of 
legislation intended to curb the supposed undue powers of 
the rich and gifted. Fear of competition engenders the popu- 
lar sentiment for ' ' protective ' ' tariff, for restriction on immi- 
gration, for regulation of convict labor and the like. 

In the face of such conflicting opinions we may well pause 
to inquire what the effect of competition really is, and why 
it is that views on this subject are so divergent (346). 

Before any headway can be made in this direction, it is 
necessary to know precisely what competition really is. Liter- 
ally it means an endeavor to obtain what others at the same 
time are trying to acquire. Thus, if a number of men seek to 
buy something of which the supply is less than the demand, 
there will ensue a bidding up among the buyers. On the other 
hand, if a number of men have for sale something of which the 
demand is less than the supply, each will try to sell his stock 
by underbidding the others. Whether the competition arises 
within the ranks of the buyers or of the sellers depends on the 
market supply of the particular thing in question in con- 
junction with the effective demand therefor. 

Competition can be fully effective only where commercial 
and industrial freedom is in no way hampered or restrained ; 
it beoomes more or less inoperative where monopoly or other 
forms of restriction prevail. Since the effect of such re- 
strictions will be the subject of a later chapter, we shall at 
present consider only such effects of competition as would 
follow under conditions of unrestricted production and 
exchange. 

Under normal conditions each worker will choose that occu- 
pation which, according to his inclination, ability and oppor- 
tunities, will yield him the best results. If, for any reason, 
the output of various occupations is not in proportion to the 
demand, the current prices of the various goods will not be in 
proportion to the efforts of production. The desire of men to 



148] THE PROCESS OF APPORTIONMENT 185 

derive the greatest income from their labor will then cause an 
exodus of workers from the overcrowded branches leading to 
an adjustment, not only of the amounts produced in all 
branches, but also of the prices (343). 

148. Direct Effects of Competition. — In the existing con- 
dition of any of the arts, industries or professions, the supply 
of its products or services depends ultimately on the number 
of men employed in it, and this number is regulated in two 
ways: (1) by the enlistment of the rising generation in that 
particular trade or vocation and (2) by any subsequent change 
of occupation, or, what we may designate as "migration" 
from that vocation to others and vice versa. 

So long as the recompense in all the different vocations 
corresponds in the main with the effort expended, there is 
no special inducement for workers to migrate from one to 
another, and although there may be some shifting of workers, 
the relative supply will remain unchanged. Should it happen, 
however, that some one field of activity appears to afford an 
advantage over the rest, especially if for some reason it offers 
more recompense in proportion to the effort required, an in- 
creased migration toward the more favored occupation will 
naturally ensue. On the other hand, if some one occupation 
becomes, for any reason, less remunerative than others, always 
considering the required effort, migration from it will predomi- 
nate. The relative volume of supply in the more inviting 
branches will thus be increased, while in those in which dis- 
advantages arise to the producer, supply will be lessened (221) . 

In this study the diagram may again be of assistance. Sup- 
pose Fig. 2 be taken to represent demand and supply of a 
given commodity in a given market. If, then, for some reason, 
no more than the quantity Oq' is produced and offered in the 
market, the competition of the would-be buyers will raise the 
price to the final utility q'd', while the marginal cost of pro- 
duction is q's'. This constitutes an attraction that induces 
migration toward this particular occupation. Supply will 
therefore be increased until its amount reaches Oq, when 
marginal cost and final utility become equalized. If, on the 
other hand, the original supply is greater, say equal to Oq", 



186 DISTRIBUTION OF WEALTH [148 

the final utility q"d" will be less than the marginal cost q"s", 
and since a market for all of these products or services can be 
found only at a price equal to the final utility q"d", the supply 
will be reduced, by migration from the respective occupation 
or by reduced enlistment of apprentices, until the normal 
amount Oq is reached. 

The primary effect of competition is clearly a double one. 
In the first place, hy drawing workers from one field to another, 
it tends to adjust the supply of each 'branch to accord with the 
relative demand (366) and, in the second place, it equalizes 
marginal cost of production and final utility, both becoming 
thereby determinators of price. 

These conclusions clearly show the folly of the proposition, 
advocated by some socialists, to establish a statistical bureau 
with power to regulate the amount of production in each 
trade, so as to avoid congestion of the market. Only free 
competition can properly and justly regulate the volume of 
production and exchange in the various branches of industry 
and commerce. 

It will be remembered that the line SS' of Fig. 2 can appear 
as a rising curve only when the ''sellers' price limit" is con- 
sidered either from the standpoint of the land owners, or that 
of the capitalists, or that of the workers, whether employed or 
employers. In each case the curve follows a different course 
and has a different significance. In studying the effect of the 
competition of labor, in other words, the effect of the migra- 
tion of workers from one occupation to another, on the volume 
of the supply of a given commodity, the curve SS' must be 
viewed as representing all the different price limits of the 
workers who contribute to that supply (61). The various 
price limits are determined by the earning capacity of the 
various workers in their various occupations of second choice, 
for it is only when the recompense afforded by different lines 
of employment changes so as to reverse the order of choice 
of some of the workers that migration from one trade to 
another will be prompted. The difference in the price limits 
of the different suppliers, represented by the various ordinates 
of the rising curve SS', is due to the fact that among the 



148] THE PROCESS OF APPORTIONMENT 187 

workers in the one pursuit presented by the curve there are 
always some who can turn without disadvantage to some other 
pursuit, while the rest can do so only with more or less diffi- 
culty and at more or less loss. Those who are equally pro- 
ficient in some other occupation than that in question are the 
first to turn to that other pursuit whenever some cause for 
such change arises. It is these shifting workers who are the 
marginal 'producers in their particular pursuit. 

Let us obtain a clear conception of what is really meant by 
the margin as regards labor. 

According to definition (62), the margin is where pro- 
duction is being continued at the greatest cost or under the 
most unfavorable circumstances ; there the price limit or ' ' cost ' ' 
equals the price, as indicated at the point a of the diagram. 
The marginal worker is he who is equally efficient in two 
occupations. He was among the last of those who entered the 
field of his present employment when its advantages were 
rising, and is among the first to leave it when its advantages 
decline. 

To recapitulate: Whenever the balance of advantages 
among the various pursuits is disturbed for any reason, only 
such workers as are at or near the margin are apt to turn 
from their occupation to some other. Their occupation of 
first and second choice will have changed places. Migration 
from one field of effort to another takes place principally 
among the workers who are at or near the margin of pro- 
duction, as indicated at a of the diagram, and this readjust- 
ment of workers is, as a rule, no greater than is sufficient to 
bring about a new balance (223). It is through the marginal 
workers and those who are near the margin that the volume of 
supply is regulated, for it is they who shift from one occu- 
pation to another when the attendant circumstances change. 

Many economists consider that the laborers who receive 
the lowest wages are the marginal workers in all fields of 
production, but this is a mistake. The rate of wages per 
hour or per week has no bearing on the position of the 
workers as regards the margin of production, for this rate 
measures only individual efficiency. Of two workmen in the 



188 DISTRIBUTION OF WEALTH [U9 

same trade one may be quick and intelligent and make high 
wages, not only in that trade, but also in that other occupa- 
tion to which he can turn, while the other, being slow and 
dull, receives but low wages in that trade or in any other. 
Yet, both are at the margin if they can turn at will from one 
occupation to some other. So are the workers who receive 
high as well as those who receive low wages ivithin the margin 
of the pursuit in which they are engaged, if they cannot turn 
to some other occupation at equally satisfactory recompense. 

149. Indirect Effects of Competition. — If aU men were 
equally efficient in their work and equally intelligent, and if 
all occupations were equally arduous and equally difficult to 
master, in short, if all lines of work were alike as regards the 
effort required, competition would tend to adjust the value of 
all products so as to be proportionate to the time spent in pro- 
duction. An intuitive recognition of this has given rise to 
the doctrine that "labor is the real measure of value," which 
was promulgated by Adam Smith and subsequently elaborated 
by Rieardo, Marx, and others (30, 164). 

But the premises are not altogether in harmony with 
facts. Not only are there all kinds of differences in the char- 
acteristics, qualities and capabilities of men, but, in addition, 
some occupations are more irksome than others, or are more 
difficult to learn, or are exposed to greater risk as regards 
success, or are more dangerous to health and life. The more 
arduous pursuits as well as those involving greater risk are 
avoided, and those requiring special education or talent are 
taken up by fewer individuals. The consequent check on the 
supply of products and services in these pursuits tends to 
keep prices up to a point where the greater gains make up for 
the greater risk, irksomeness or other sacrifice, or for the 
more efficient exercise of faculties. One occupation may be 
more remunerative than another, but being more disagree- 
able, or more dangerous, or requiring more time and effort 
for its mastery, a man may turn to the less remunerative pur- 
suit as his first choice (44). Thus it is not gain alone that 
is taken into account in such selection, but a number of other 
factors as well. The difficulty, irksomeness and risk of any 



149] THE PROCESS OF APPORTIONMENT 189 

given occupation are reflected in the higher price of its 
products. 

This proposition has a broad range of application, inas- 
much as the difficulties in question may be of a most varying 
description, including even burdens of an artificial nature. 
If, for instance, a special tax is put on the production of a 
certain class of goods, their producers will naturally add this 
expense to the price of the products. If, then, consumers 
hesitate to buy at the higher price, an exodus of some of the 
producers from the trade will follow, resulting in a reduction 
of the supply, until it adapts itself to the reduced demand. 
When this point is reached, no further change in the volume 
of production will take place unless the equilibrium is again 
disturbed. 

This process of readjustment may be illustrated by dia- 
gram. Let S8' and DD' of Fig. 12 represent the existing 
supply and demand of a given article. The price then equals 
qa, and the quantity supplied equals Oq. But if to the cost 
of production an additional item ST is added, say by a special 
tax, the supply curve, which, as we have learned, depends on 
the cost of production, becomes bodily shifted to the higher 
position TT'. An adjustment will then ensue so that there- 
after the price will equal q'a' and the amount produced Oq\ 

The effect may be summarized as follows: 

The producers located between the points q' and q leave 
the trade, finding other occupations more attractive, and the 
quantity produced is reduced from Oq to Oq', the intersection 
a' indicating the new margin. The price q'a' will then consist 
of the cost of production q's' at the new margin, plus the tax 
s'a'. The quantity q's' being less than the original correspond- 
ing quantity qa, the decrease must be borne by the workers ; 
in other words, wages in that trade are reduced in the pro- 
portion in which q's' is less than qa. 

But the process of readjustment will not end there. It will 
be remembered that the different ordinates of the rising curve 
88' represent the earning capacity of the workers in their 
various occupations of second choice, that is to say, in the 
occupations to which they may take recourse as an alternative. 



190 DISTRIBUTION OF WEALTH [i49 

and that the ordinates of the branch Sa are less than the 
normal ordinate qa mainly because the respective workers are 
competent only in one occupation and cannot readily turn to 
some other. Wages in the pursuit under consideration having 
fallen, as shown above, the affected trade will become less 
inviting than other pursuits, and since fewer learners will 
choose it,*^ the readjustment will continue and the supply will 
be still further reduced, until the marginal producers in that 
line again obtain a recompense equal to that which originally 
accrued to marginal producers. In other words, the curves 
SS' and TT' will be changed to 88" and TT", the price will rise 
to the point a", and production will be reduced to the volume 
Oq". The marginal cost which determines the price q"a" will 
then be made up of q"s", equal to the former marginal cost, 
plus the tax s"a". This shows that in the end the consumer 
pays the entire tax. 

As it is really immaterial what kind of burden it may be 
that impedes production, we are justified in the following 
conclusion : 

Whatever impedes production, whether it he the difficulties 
inherent in the work, or burdens imposed hy law or custom, has 
the double effect of increasing the price and of reducing the 
demand for that product (219, 220). And in the end it is the 
consumer and not the producer who pays for every increase in 
the difficulty or in the cost of production (358). 

This statement does not imply that the producer in no 
way suffers loss on this account, for his recompense will be 
reduced whenever for any reason the cost of production is 
increased, and his income will suffer until the market has 
adjusted itself to the new conditions. Of the period of 
transition we shall speak later (221). Moreover, the above 
conclusion is inapplicable when the new conditions do not 
uniformly affect all producers in the same line. Thus, if a 
tax or other exaction is unequally imposed, prices respond to 
the extent in which the marginal producer is affected. 

*' In considering the original curve 8S' as representing normal 
conditions, it is of course implied that the wage qa attracted learners 
to the pursuit in question in a degree equal to that of other pursuits. 



149] THE PROCESS OF APPORTIONMENT 191 

For the same reason that artificial as well as natural ob- 
stacles to the production of a given class of things cause an 
increase in their prices, a removal of such impediments has 
the effect of lowering prices. It is well known that whenever 
the difficulty of producing any given commodity is lessened, 
be it by the introduction of better systems in production or 
of new inventions, the increased supply due to these new con- 
ditions causes a lowering of the price, which, in turn, results 
in an increased demand, until a new equilibrium between sup- 
ply and demand and between marginal cost and final utility 
becomes established. Although the producer may for a time 
reap an unusual profit, that advantage gradually gives way 
under competition, and in the end the consumers of the things 
of which production has heen facilitated reap the entire benefit 
(192,243,368). 

This conclusion is true with regard to all forms of economic 
advantage. For instance, a by-product, previously valueless, 
may become valuable when a use is found for it. But the 
producer will not long reap an increased revenue, since the 
new advantage makes the business attractive to others, and the 
increased supply, in course of time, reacts upon the value of 
the total output, principal as well as by-product, whereby the 
benefit is again transferred from the producer to the con- 
sumer. 

It is thus manifest that competition affects the value of 
commodities and services, no matter how different in kind, 
so as to make their values proportionate to the amount and 
the nature, the quantity and the quality oi the efforts expended. 

Efforts of the same kind are, of course, compared on basis 
of their results, and not on basis of the time expended or of 
the physical strength applied. And where the efforts are dif- 
ferent in kind, as, for instance, a carpenter's, a musician's, a 
lawyer's, their relative market value is determined by compe- 
tition, and this competition finds expression in migration of 
marginal workers from one occupation to another, whenever 
such change holds out better prospects to the worker. The 
relative value of any two different forms of service is thus 



192 DISTRIBUTION OF WEALTH [i50 

traceable to the relative estimation of the marginal workers, 
that is, workers equally skilled in both occupations. 

Through the many workers who are in position to turn 
from their occupation to some other, workers who are near 
the margin in their present line of effort, this pursuit is 
brought into direct competitive relation with many other pur- 
suits, and these being in their turn in similar relation with 
others, a competitive relation among all different lines of 
activity is established, through which the relative market 
value of all forms of service becomes adjusted. 

Still another effect of competition remains to be touched 
upon, namely its tendency to "put the right man into the 
right place." There is competition not only among workmen 
for places open to them, but also among employers for men 
to fill these places. Each employer must therefore pay as 
high wages as other employers are prepared to offer. And 
inasmuch as each employer naturally seeks to utilize the pur- 
chased service to the best advantage, the tendency is to place 
each worker into the position of his greatest efficiency. It 
follows that competition not only adjusts the relative pay for 
different kinds of work, but also assigns to each worker that 
place for which he is best adapted. 

150. The Law of Value Presupposes Free Competition. 
— In the course of our investigation (63) we found that in a 
normal market final utility and marginal cost of production 
are equal quantities and that it is competition which brings 
about this equalization. Where competition is obstructed 
(225), the law of supply and demand has not the effect of 
equalizing marginal cost and final utility, and prices rise 
above marginal cost. Only where competition is free, where 
there is nothing to interfere with the free choice of occupa- 
tion and the freedom of exchange can it come to pass that the 
proceeds from the sale of coats are equitably shared among 
the shepherd, the spinner, the weaver, the tailor, the merchant 
and all those who assist in making and selling coats, and this 
applies with equal force to all commodities in the market 
(153). 

We have now briefly covered the field of competition as far 



151, 152] THE PROCESS OF APPORTIONMENT 193 

as it relates to our inquiry. The method by which we have 
reached our present conclusions is that of strictly logical de- 
duction from accepted premises. These conclusions are in sub- 
stantial agreement with the tenets of that school of economics 
which holds to the principle of laissez faire. We have not 
thus far turned to experience to verify our conclusions. But 
when we do so, we find that in practice they do not seem to 
be uniformly confirmed. It is therefore not surprising that 
the prevailing view regarding the effect of competition is by no 
means in harmony with the conclusions we have reached. The 
discrepancies call for explanation, and that explanation we 
shall find in the course of our further inquiry (342-346), 

151. Apportionment of Proceeds of Production. — ^We are 
now prepared to go more fully into a detailed study of the 
double process of distribution, consisting of a division of the 
proceeds from the sale of consumption goods, first, among the 
contributing groups, and second, within the groups among the 
individual participants in production (127). 

This division is effected through the various disposals of 
the gross income of each group. Distribution among the 
groups is accomplished through payments for goods or ser- 
vices received by one group from other groups (152), while 
distribution within the groups is realized through compensa- 
tion to employes, whether in the form of wages, salaries or 
other recompense, through payment of rent to the owner of 
the land used if this land is rented, and through payment of 
interest if the capital goods are leased or if money has been 
borrowed. That which remains goes as a residual share to the 
employer or to the owner of the business. It follows, of course, 
that if the employer is also the owner of the land or of the 
other capital in use or both, the residual share will include 
rent or interest or both. 

152. The Function of Capital Goods in the Apportion- 
ment. — ^While in the modern industrial system some part of 
the work of production is performed years before the consump- 
tion products can become available, the workers who perform 
that part receive their compensation before the final disposition 

13 



194 DISTRIBUTION OF WEALTH [152 

of the products. This would seem to conflict with the proposi- 
tion that the recompense for this labor is derived from the 
proceeds of the sale of the final consumption goods. How can 
the proceeds be shared before they are realized? 

The answer to this question is not far to seek. We are 
here dealing with the production of material wealth. In the 
course of this process the products of nature are transformed 
by labor into commodities which have a market value even 
though as yet unfit for final consumption. This applies as 
well to means of production, like looms which disappear by 
wear, as to goods in course of production, like yarns which 
become part of the final product (132). All these things 
should be looked upon as partly finished consumption goods. 
The looms as well as the yarns are partly finished garments. 
As a thing is industrially advanced from stage to stage by 
cooperative groups, or by workers acting as such, it enters 
each successive process either as a means of production or as 
a raw material, and emerges as the finished product of the 
respective group. To the spinner for whom the yarns are 
finished goods, the wool is the raw material. The yams are 
the raw material of the weaver who finishes the cloth which, 
in turn, is the raw material of the tailor. The spinner, in 
buying the wool, pays for the work which the shepherd has per- 
formed toward the making of the coats. The weaver pays the 
spinner a price for the yams that covers the recompense for 
the work of the shepherd as well as the spinner. The tailor, in 
buying the cloth, must lay out the shares which are due to 
shepherd, spinner and weaver. Each successive operator in- 
vests in the partly finished coats by purchasing the raw 
materials, expecting to be reimbursed for this outlay and for 
his own labor by the sale of that which he produces. The 
payments made to those who furnish the preceding efforts 
are manifestly advance payments, to be finally recovered from 
the price of the coats. This is true as regards all services con- 
tributing to the production of the final goods — the coats of our 
illustration — and applies to the earnings, not only of the shep- 
herd, the spinner, the weaver and the tailor, but also of those 
who make the sewing thread and the buttons, of the iron and 



153] THE PROCESS OF APPORTIONMENT 195 

coal miners who supply the material and fuel for the ma- 
chinery, of the builders of the machines, the clerks, book- 
keepers, salesmen, and so forth. 

We here see that the intermediate or immature products, 
be they means of production or supplies, perform, as carriers 
of value, an important part in the distribution of the proceeds 
from the final products (151). Through the value which they 
carry the preceding efforts are paid for out of the ultimate 
proceeds before these proceeds are realized. The value of these 
unfinished products may be compared with charges attached 
to a bill of lading. The charges for the earlier efforts are 
carried forward, in the form of "value" of the capital goods. 
A study of the conditions which determine these values must 
furnish a clue to the rate of distribution among the several 
groups that perform the several operations. 

153. The Value of Capital Goods. — If we seek to apply 
the law of supply and demand to the value of capital goods, 
we find that this law is not directly applicable to that value. 
We have heretofore traced demand to a desire for gratification 
(58), but capital goods are incapable in their existing form 
to gratify desires. They do not possess "utility" in the 
sense in which we have used the term, namely the utility of 
consumable goods. What utility they possess is only in a 
latent or potential state and as such is not available for 
gratification. We must accordingly trace the demand for the 
intermediate to the demand for the final goods. So long as 
the tailor can sell coats, he will buy the necessary materials. 
The resulting demand for cloth engenders a demand for yams, 
and this again a demand for wool. So must the demand for 
looms and other means of producing cloth be traced to the 
demand for clothes. This latter is the only cause of demand 
for all the materials and equipments used in the production of 
the clothes — or whatever the final products may be — and the 
question of the extent to which this demand applies to each 
of the various materials and equipments that enter into pro- 
duction is the problem now before us. 

The question of the value of immature products, and par- 
ticularly of means of production, is really a problem by itself. 



196 DISTRIBUTION OF WEALTH [153 

The incentive that creates the demand can be traced to human 
desires only in an indirect way. The demand for looms on the 
part of the cloth manufacturer arises from his confidence that 
he will find a market for the cloth he intends to have made 
by their use, and the demand for cloth is ultimately due to the 
utility of the apparel to be made from it. The loom is the 
embodiment of certain of the services necessary to make the 
thousands of coats that will be completed through its use, 
and these services are gradually transferred from the loom 
to the cloth as the loom is utilized, at the average rate at which 
the loom deteriorates while being used (10) . At the same time, 
the potential utilities of the means of production are gradually 
converted into the actual utilities possessed by the final 
products. 

It is readily to be seen that the volume of demand for 
capital goods cannot respond to a change of the price as 
readily as is the case with consumption goods. This will be 
found especially true of the means of production and, likewise, 
of the goods themselves in their earlier stages, A loom, 
for example, may be used for weaving the cloth of many 
thousands of coats. For this reason an exceedingly small por- 
tion of its value will enter into the price of one coat. The 
demand for looms, as we have seen, is governed by the demand 
for clothes, and this demand would be affected very slightly 
indeed, if the cost of looms were doubled, as the price of coats 
would be but slightly affected. Nor would the demand for 
looms be noticeably increased if their value were reduced to 
one-tenth. We have clearly to deal with a product of the 
kind represented in Fig. 9 and must look principally to mar- 
ginal cost as determinative of its value (64, 332) . We should, 
accordingly, concentrate our attention on the conditions that 
determine the marginal cost of production. While the value 
of the mature product is determined mainly by final utility, the 
value of the intermediate products — looms, wool, yams, cloth 
and so forth — is dependent principally on marginal effort. 
Whenever the prices of these intermediate products are such 
that any one of the contributing occupations affords less recom- 
pense for equal effort than others, a migration of workers from 



154] THE PROCESS OF APPORTIONMENT 197 

it to the others and a readjustment of prices will set in until the 
compensation of each trade is in proportion to effort put forth. 

The utility theory of value is manifestly inapplicable to 
capital goods. Suppose we are to ascertain the value of a 
quantity of cloth for 100 coats, the finishing and selling of 
which will average 6 months. According to this theory the 
value of the cloth is the discounted value of the future utility 
of this cloth. But what is the future utility of this quantity 
of cloth? The nature of this utility is certainly that of coats, 
but its quantity cannot reasonably be held to equal the utility 
of the total 100 coats. For example, suppose the value of a coat 
is $20. The value of the cloth will then surely be less than 
$2000 discounted at 6 per cent, per annum, that is, 3 per cent, 
for the half year required for completing the coats. If it were 
that amount, namely $1940, the tailor who pays that much 
when he buys the cloth would, by selling the coats six months 
later, get back only the purchase price with interest, but noth- 
ing for his labor. The value of the cloth is therefore the dis- 
counted value of fewer than one hundred coats. But how 
many less ? What is to determine the number ? Is it 10 coats 
or 90 coats or some number between? There is nothing to 
go by unless we take cognizance of effort or labor as co-ordinate 
with utility in the determination of this question. This con- 
firms what we have heretofore noted (62), namely that the 
utility theory of value fails to trace value to its primary factors. 

It is now clear that so long as complete freedom of com- 
petition prevails and workers are free to choose their occu- 
pation, the division of the proceeds from the final products 
among the contributing groups — in the case of coats, among 
the groups represented by shepherd, spinner, weaver, tailor, 
merchant, etc. — ^will adjust itself in proportion to the relative 
difficulty of rendering the services contributed by each group 
(150,267). 

154. Apportionment within Groups. — ^Let the line AG of 
Fig. 13 represent the gross income of a group. This amount 
is divided at B into two principal parts, the first of which, the 
"cost of supplies" AB, covers the payment for all services 
obtained from other groups in the form of raw materials, 



198 DISTRIBUTION OF WEALTH [154 

supplies, means of production, etc. The other part BG, which 
constitutes the "net income" of the group and represents the 
value produced by the group, is the fund from which all 
forms of profit and all forms of wages are ultimately shared 
out (127). Of this net income a portion BC goes to land as 
rent, another portion CE goes to capital goods and to money 
as interest, and the remaining portion EG goes to labor as 
wages. The rate at which this division takes place varies 
according to circumstances, and the question now before us is : 
what is it that governs this division and determines the various 
shares that go to the various members of the group? There 
is here no place for chance profits, because these are in the 
average balanced by chance losses. 

It is quite apparent that the gross income of each group, 
obtained from the sale of its products, is normally divided into 
four principal parts. Of these the portion AB goes to make 
up the gross income of other groups, and as such is again 
similarly divided. But since the group which first derives 
the raw material from nature has no charges corresponding to 
AB to pay, the sum total paid by the consumers for the final 
products is, in the last analysis, divided into rent, interest 
and wages, of which the first two are to be classed as capital 
profits. 

This brings us face to face with the essence of the problem. 
What is it that determines this division? 

We already know that the first division at B is regulated by 
competition. But if we attempt to learn at what rate the net 
income BG oi each group is divided into capital profits and 
wages, we discover that the law of competition does not apply, 
since the services rendered by labor are radically different from 
those rendered by capital, the former being personal, the latter 
impersonal. There can he no competition between capital and 
labor. Industrial migration, which is the principal factor 
of competition, may take place between any two lines of 
activity. A man may be in a position to choose between 
teaching philosophy and laying bricks, if these happen to be 
his occupations of first and second choice. But between such 
service as that rendered by labor and that rendered by capital 



155] THE PROCESS OF APPORTIONMENT 199 

there is no alternative. The sharing of the proceeds of indus- 
try hetween capital and labor, the division into profits and 
wages, cannot therefore he regulated ty competition. We 
must look further for the economic forces which determine 
this division, or for some common ground on which to compare 
the two kinds of service (180). 

By furnishing capital to a group of workers the capitalist 
becomes a participant in production, and as such he is entitled 
to a share of the product. But to what extent does his title go ? 

It is self-evident that he is primarily entitled, beyond all 
risk, to a return of the full value which he contributes. We 
know, however, from experience, that the share he receives is 
more than the amount of the capital he has furnished. What 
he actually gets is (1) compensation for wear and tear and 
for risk of loss, which tend to maintain undiminished the value 
he has furnished ; and beyond these obvious items he obtains (2) 
compensation for the use of capital, or capital profits, the real 
nature of which is not so obvious. It accrues for that service 
of the capitalist which consists in surrendering the use of his 
wealth, whether consisting of land, of capital goods or of money 
(265), and this is an impersonal service. How this service of 
the capitalist is to be compared with the service of the workers 
who give their labor remains to be learned. 

That the division of the net income of a group into wages 
and capital profits does not occur at a constant rate is plain 
enough. In some trades only a small amount of capital can be 
advantageously employed. The tools of a bricklayer are few 
and simple. In trades of this kind practically the entire net 
income becomes wages. In other enterprises a larger amount of 
capital is needed in proportion to labor, and in these a pro- 
portionately greater part of the net income goes to capital. 

155. Economic Relations of Labor and Capital. — In view 
of the general uniformity of the rate of capital returns in all 
the ordinary fields of production there can be no doubt that 
certain definite forces are at work that govern the apportion- 
ment of the net income of the productive group between capital 
and labor. What are these forces and how do they operate ? 

Let us turn again to the diagram Fig. 13 in which the divi- 



200 DISTRIBUTION OF WEALTH [i56 

sion of the net income BG into profits and wages is marked by 
the point E. What is it that determines the position of that 
point? All we know, to start with, is that profits and wages 
together make up the sum total BQ of the net income. In the 
terminology of mathematics, we have two unknown quantities 
and thus far only one equation. We are to find the quantities 
BE and EG and as yet we know only their sum BG. A second 
equation is necessary to find how that sum is divided. We must 
find either what it is that determines the rate of interest and 
accordingly the share BE of capital, leaving the balance EG 
to labor; or else, what it is that determines the share EG of 
labor, leaving the balance BE to capital. Is it the share of 
capital or that of labor which comes first (160, 267) ? 

As a first step in this inquiry, we must find how the produc- 
tivity of labor is affected by the employment of different 
amounts of capital. 

156. Influence of Capital on the Productivity of Labor. — 
In producing any given kind of commodity, various methods 
and modifications of methods can be adopted, some being more, 
others less effective (10a). It is generally found that the effi- 
ciency of labor is enhanced with the extension of specialization 
and with the application of more complex means of produc- 
tion, and that each advance in this direction is attended by the 
employment of a larger amount of capital. 

But that the efficiency of labor increases with the amount 
of capital employed is true only up to a certain point. The 
employer of a given amount of labor, say one hundred men, 
cannot indefinitely increase the output of this labor by addi- 
tions to his capital, for in time he will reach a point of ' ' dimin- 
ishing returns," that is, a point beyond which a further in- 
crease of capital actually results in diminishing the produc- 
tivity of the labor employed (10&). Machines may become 
so intricate in the effort to make them more completely auto- 
matic that the extra cost of construction, operation and repair 
will exceed the benefit that may be derived from the attempted 
improvements. Or the division of labor may be carried so far 
that the increased cost of handling the goods exceeds the sav- 
ing of labor attained by the last step in the specialization. 



157] THE PROCESS OF APPORTIONMENT 201 

157. Graphical Analysis. — The relation that exists between 
the efficiency of labor and the amount of capital employed 
may be represented graphically. The yearly production of a 
certain amount of labor, say of one hundred men, working 
with a varying amount of capital, may be indicated by the 
curve PP' of Fig. 14, in which the horizontal dimension meas- 
ures the amount of capital employed, and the vertical dimen- 
sion the corresponding amount produced.** 

Working with practically no tools, the efficiency OP is very 
small. As the amount of capital is increased, the amount pro- 
duced by that labor also becomes greater, and the graphical 
representation of this condition takes the form of a rising 
curve. According to experience, this rise of the curve becomes 
gradually less, until, beyond the point p, the curve takes a 
downward direction. This point of the curve, which marks the 
point of diminishing returns, also marks the greatest possible 
productivity attainable through the given amount of labor, 
the corresponding amount of capital being equal to OC. 

This curve PP' is assumed to refer to a given trade and to a 
given state of the art. If by further discoveries and inventions 
the state of the industry is advanced, the curve will change its 
course accordingly. This contingency is here left out of con- 
sideration, as we must necessarily start from some definite 
premise. Moreover, it is here assumed that the capital is used 
intelligently and that the best method of production consistent 
with the amount of capital in question is selected. It is obvious 
that an incompetent employer may, in his ignorance, increase 
the amount of capital, without thereby increasing the efficiency 

*' When we speak of the amount produced liy the efforts of a given 
group of producers, this does not mean the gross value of the products 
turned out, but only that part of this value which is due to the 
services rendered by the members of that group. From the gross value 
is to be deducted all that is paid to contributing groups for means of 
production, raw material and other supplies or services. It is particu- 
larly to be observed that in the amount so deducted are to be included 
the items which go as amortization and as insurance to the capitalist 
of the group. The latter, in his capacity as supplier of the capital 
produced by other groups, is in a position outside of the group in which 
he is a member only as owner of the capital goods supplied (265). 



202 DISTRIBUTION OF WEALTH [158 

of the employed labor. Such ineffective utilization of capital 
is here, of course, not to be considered. 

158. Effect of a Varying Interest Rate. — At first glance 
it may appear that the amount of capital most advantageously 
employed with the given amount of labor is OC (Fig. 14), be- 
cause with this combination the greatest amount of goods will 
be produced. A brief consideration will, however, reveal that 
this is not the case. Capital demands a return on the basis 
of the current rate of interest, and the employer has therefore 
to consider the cost of employing capital as well as the cost 
of employing labor (160). 

Suppose, now, that on the basis of the current rate of in- 
terest the return demanded by an amount of capital equal to 
OC is equal to Ci.*^ After deducting this amount Ci from the 
total proceeds Cp, the employer will have left an amount equal 
to ip, from which he must defray the wages of the employes, 
the remainder being his own wages. 

If a smaller amount of capital is employed, the share going 
to capital is, of course, correspondingly less. The inclined line 
Oi indicates this variable share. If the employer applies an 
amount of capital equal to OC, the cost of the use of this capital 
*s C'i', and the residual share is i'p' instead of ip. 

A glance at the diagram shows that i'p' exceeds ip, which 
means an increased revenue to the employer. Indeed, the in- 
come of the employer is greatest if he uses an amount of capital 
OC, corresponding to that point p' of the curve PP' at which 
the tangent is parallel to the line Oi (161). This, then, is the 
most advantageous combination of capital and labor from the 
standpoint of the employer, for although labor is at this point 
not employed at its maximum efficiency, his personal wages 
as manager will then be greatest (267, 347). 

Were the rate of interest higher, so that CI represented 

"In order to avoid a too great elongation of the diagram, its 
horizontal dimension, measuring tlie capital employed, is on a smaller 
scale than the vertical, vrhich measures the value of the products. This 
must be remembered in comparing the two dimensions, as otherwise 
the rate of interest graphically represented must appear out of pro- 
portion. 



159] THE PROCESS OF APPORTIONMENT 203 

the charges for the use of the capital OC, the higher rate would 
cause the employer to use capital more sparingly. His own 
interest would be served best by limiting the amount of capital 
employed to OC", the point C" being found by locating on the 
curve PP' that point p" where the tangent is parallel to the 
line 01. The productivity of the given amount of labor would 
then be C"p", which is divided by the point I", the lower sec- 
tion CI" being the share due to the invested capital, the 
remainder, namely I"p", being available for wages, to be 
shared between employer and employed. 

159. Effect of Interest Rate on Wages. — These considera- 
tions point out the influence which the rate of interest has upon 
wages. A high rate of interest keeps wages at a low level for 
two reasons. In the first place, the more restricted use of 
capital entails a lessening of the amount that can be produced 
by a given amount of labor, the reduction in our illustration 
being from C'p to C"p" (Fig. 14) , which simply means a reduc- 
tion of the efficiency of labor (262). In the second place, a 
greater proportionate share of the value produced accrues to 
capital, and a correspondingly smaller share to labor. A low 
rate of interest has, of course, the opposite effect (318), but 
the employer would not be justified in increasing the amount 
of capital to OC, unless the interest rate were to fall to nil, 
when the productivity of labor would be raised to its natural 
maximum Cp, and the entire product would become wages. 

The proposition that a high rate of interest means low 
wages, and vice versa, although repeatedly advanced, has as 
often been contested on the ground that in prosperous timesi 
both wages and interest are found to be high, whUe during 
periods of business depression both forms of income are low. 
From this it is inferred that the same cause which makes in- 
terest high makes wages high, and vice versa. But we are here 
not speaking of the difference between good times and bad 
times. It is quite obvious that when through any cause the 
total of production is reduced, there is less to be divided 
between capital and labor, and both must accept correspond- 
ingly low returns. And when the amount of production is 
great, as is the case when times are prosperous, the greater 



204 DISTRIBUTION OF WEALTH [leo 

total product affords larger returns to both. We have here 
under consideration the effect of a varying rate of interest 
upon wages while all other things remain equal. The amount 
actually produced within a certain time being given, it is self- 
evident that if a greater share goes to capital, a smaller share 
is left for labor, and vice versa. In this division of the net 
income BO (Fig. 13) any increase of the share BE accruing 
as profit to capital necessarily entails a reduction of the share 
EG accruing to labor. 

1 60. Effect of a Varying Wage Rate. — The foregoing ex- 
amination of the effect of changes in the interest rate on the 
productivity of labor has brought us no nearer to the solution 
of our problem, which is to find the causes that determine the 
respective allotments to labor and to capital, for we assumed 
the rate of interest as given. Wages were accordingly sup- 
posed to consist of the remainder of the proceeds after capital 
profits had been paid, which means that capital profits come 
first. But at the present stage of our inquiry we have not yet 
found whether capital profits or wages take precedence (155). 

Let us assume now that it is the share of labor EG of Fig. 13 
which comes first and that the wages of the one hundred men 
of our illustration are represented by the ordinate OW of 
Fig. 15, in which the curve PP' is again used to represent their 
varying productivity, according as they work with a smaller 
or larger amount of capital. In this event it is the owner 
of the capital who gets the residual share, and it is accordingly 
in the interest of that owner that only so much of capital is 
employed as will bring the greatest rate of returns. 

The ordinate W of the horizontal line WW indicates what 
portion of the total value produced must be paid to labor, only 
the balance remaining as profits. Hence, by employing the 
amount of capital DC, the total product will amount to Cp, 
of which the share CW" goes to labor and the remainder W"p 
to capital. The rate of this profit is expressed by the ratio 
W"p to WW", and if the line Wp is drawn, its slope is a 
measure of this ratio. 

In analyzing the preceding case (158), we found that it was 
not to the best advantage of the employer to use the amount of 



161] THE PROCESS OF APPORTIONMENT 205 

capital OC, by means of which the maximum productivity Cp 
is attainable. In the present case the same is true as regards 
the best advantage of the capitalist. When the lesser amount 
of capital OC is used, the rate of profit on this invested capital 
is indicated by the slope of the line Wp'. Although the share 
Wp' on the smaller investment is less than W'p, the rate of 
profits is noticeably greater. 

Were the wage rate lower, so that the total wages of the 
labor employed would be Ow, the capitalist would find it most 
advantageous to employ no more capital than OC", for the 
greatest rate of profits obtainable under the circumstances 
would be indicated by the inclination of the line wp". 

It is dear that wages vary inversely as the interest rate, 
whether the one or the other has the precedence ; and further- 
more, when interest is high, it pays best to use cheap tools and 
cheap labor, in other words, to adopt comparatively inefficient 
methods of production. On the other hand, a low interest rate 
and high wages are coincident with a high order of industrial 
development. 

i6i. Graphical Analysis by Differentiated Function. — 
In Figs. 14 and 15 the curve PP' shows how the productivity of 
a given amount of labor depends on the amount of capital 
utilized. Productivity is there represented by the ordinates 
of the curve PP', and therefore by linear dimensions. But 
some features of the case can be studied to better advantage if 
productivity is represented in a differentiated form, in which 
event it is measured by an area instead of a line. 

In Fig. 16 the descending curve EE' represents what is 
known in mathematics as the differential of the function 
depicted by the curve PP' of Fig. 14, Both curves have really 
the same significance, but each must be interpreted in its 
own way. 

Let us suppose that the capital is provided in instalments 
Oa, ah, he and so forth. The curve EE' then indicates the suc- 
cessive increments of productivity due to the consecutive in- 
crements of capital, while, as will be remembered, the curve 
PP' of Fig. 14 is plotted so as to show the total productivity 
attained by the use of the respective amounts of capital fur- 



206 DISTRIBUTION OF WEALTH [lei 

nislied. Consequently, in order to find in Fig. 16 the total 
annual output of the given amount of labor with any given 
amount of capital, it is necessary to add up the successive 
increments of productivity, and this sum is necessarily an area, 
not merely a linear measurement, as in Fig. 14. 

"When unaided labor is supplied with the first instalment 
Oa of capital, its efGciency is increased materially, and this 
increase is shown in Fig. 16 by the ordinate aa',^^ and in Fig. 14 
by a very rapid rise of the curve FP' at the point a'. The gain 
from a second equal instalment ah is somewhat less, as sho^vn 
by the smaller ordinate hV in Fig. 16, and by a less rapid rise 
of the curve FF' of Fig. 14 at the point &'. The effect of addi- 
tional instalments is similarly shown by the continually de- 
creasing ordinates of the curve EE' of Fig. 16, and by the con- 
stantly diminishing ascent of the curve FF' of Fig. 14. When 
the capital reaches the amount OG, further additions can no 
longer increase the output, and this is indicated in Fig. 16 by 
the curve EE' reaching the base line, and in Fig. 14 by the 
curve FF' ceasing to rise. 

The difference in the way of interpreting the two diagrams 
can now be briefly summarized. If the one hundred men, 
adopted in the illustration as the given amount of labor, are 
provided with an amount of capital equal to OG", the annual 
output of this labor is measured in Fig. 14 by the linear dimen- 
sion G"p", and in Fig. 16 by the area OC"e"E. Or if OG' is 
the amount of capital supplied, the yearly production is meas- 
ured by the line G'p' and the area OG'e'E, respectively. 

When we applied the diagram Fig. 14 to an analysis of the 
case in which Gi was the interest charge for the use of the 
capital OG, we found that it would pay the employer best to 
use an amount of capital equal to OG' (168). This is con- 
firmed by a study of Fig. 16. Let us' suppose the employer 
has invested an amount of capital equal to OG", while the rate 
of interest equals Oi. The total annual product of labor and 
capital combined will then be represented by the area OG"e"E, 

"*" Strictly speaking, the increase is measured by the area of the 
trapezoid Oaa'E. 



161] THE PROCESS OF APPORTIONMENT 207 

of which the area OG"i"i represents the interest due on the 
invested capital. The portion of the total output represented 
by the area ii"e"E is thus left to the employer for paying 
wages and for his own recompense as manager. 

When considering the question of using improved machin- 
ery, or, in other words, more capital with the same amount of 
labor, the employer finds that, by adding the amount C"C', 
production is increased by the area C'C'e'e", indicated 
by shading in Fig. 17, while the interest he must pay 
for the additional capital equals the area C"C'e'i". This addi- 
tion of capital is obviously of advantage to him, as there is 
a net gain equal to the area i"e'e". He accordingly finds it 
profitable to increase the total amount of his capital to OC. 
As every such gain in production increases his personal share, 
he naturally seeks to use the most advantageous combination of 
capital and labor. 

When the amount of capital employed is equal to OC, the 
total value produced annually by the one hundred men is 
OC'e'E, which is divided into two parts by the line ie', the 
lower area being charges for the use of the capital, the upper 
area being wages. This division is shown by shading in Fig. 18. 

If the employer endeavors to increase the efficiency of the 
given amount of labor by yet further improvements, he finds 
that the additional capital C'C would enhance production 
only by the amount indicated by the area C'Ce', Fig. 19, while 
the charge for this additional capital would be represented 
by the area G'Gi'e'. As the diagram shows, this charge would 
then exceed the gain, and it would manifestly be unprofitable 
to employ more capital than the amount 0C\ Of course, if 
he has more capital to invest, he refrains from adding improve- 
ments that do not pay, but extends his business on the existing 
plan and employs more labor. 

It is now clear that if the efficiency curve EE', Fig. 16, and 
the rate of interest Oi are given, then the intersection e' of the 
horizontal line ii' with the efficiency curve EE' is the point 
which indicates the amount of capital OC that can be most 
profitably employed with the given amount of labor. 

The employer seeks to establish in his works the corre- 



208 DISTRIBUTION OF WEALTH [162 

sponding mode of production. At this point a small increment 
of capital increases production by an amount equal to the 
additional interest, and, for a like reason, a small addition to 
labor increases the output by an amount equal to its cost; 
in other words, one dollar spent as interest for more capital 
has the same effect on the output as one dollar spent as wages 
for more labor. However, the conditions responsible for that 
equality cannot be regarded as governing the rate of interest, 
since in the determination of this point the rate of interest was 
assumed. 

We proceeded on the assumption that the capital is made 
up by adding one instalment after another. But this is fre- 
quently impracticable. Where, for instance, the capital is in 
the form of machinery, the addition of another instalment 
might mean the replacement of the machines by others which 
are more efficient, but also more costly, and this change can- 
not be effected by merely supplying an amount of money equal 
to the difference in cost. This would seem to invalidate our 
conclusions. But it must be considered that machines wear 
out and that the additional capital can be made use of by re- 
placing those worn out with the improved. The problem of 
increasing the existing capital by an additional instalment 
thus becomes merely a question of time, and the conclusions 
deduced above remain valid, at least in the long run. 

162. Final Efficiency of Capital. — In applying the dia- 
grams Figs. 14 and 16 to the study of the relation of interest 
and wages to the amount of capital and labor employed, we 
assumed the current rate of interest to be given, and found 
that the interest charge makes it unprofitable to employ more 
than a certain proportionate amount of capital with a given 
amount of labor, and that, in consequence, labor fails to 
develop its maximum efficiency. But so far we have no clue as 
to why capital commands interest. 

It is generally recognized that with the gradual increase 
of capital available for use its interest commanding power has 
declined. This would seem to indicate that it is an insufficiency 
of available capital that accounts for interest instead of in- 
terest accounting for the sparing use of capital. The fact 



162] THE PROCESS OF APPORTIONMENT 209 

that capital now commands a revenue would accordingly 
signify that the amount of capital now available for pro- 
ductive use is inadequate to employ labor at its maximum 
eflQciency. The current interest theories take indeed this 
ground. Let us consider the subject in this light. 

We have hitherto applied the diagrams Figs. 14 to 19 to 
some single commodity or trade. But for our present pur- 
pose we have to extend their application to the entire in- 
dustrial domain. The diagrams are accordingly to be taken 
as applying not to a single line of production, but to the total 
of all productive labor of the community. The dimension OC 
of Fig, 16 then represents the sum total of available capital, 
and the area OC'e'E the yearly output of the entire labor force 
of the community. 

Suppose that an additional amount C'z of capital becomes 
available and is offered for loan to whoever offers the highest 
returns for it. The increase of the output that may be gained 
by its use through an increase of labor's productivity is repre- 
sented by the area C'zz'e', and the possibility of this increase 
naturally elicits a certain demand for its use. The com- 
petitors for the supply C'z being numberless and the supply 
being a limited quantity, the bids for its use will tend to run 
up to the full amount of the gain it affords. The successful 
bids then naturally fix the rate of capital profits for the 
market generally (243, 244). The rate of gain due to the last 
increment of capital is indicated by the ordinate zz' and is 
termed the "final efficiency of capital" (242a) when Oz is 
the available amount. Hence, if the amount of capital is in- 
deed limited, its iinal efficiency is the cardinal factor in the 
determination of the rate of capital returns (195). 

It is now manifest that if we can find a cause for such 
limitation of capital which prevents the employment of labor 
at its maximum productivity, we will know all that is neces- 
sary to account for capital interest (242&). And capital in- 
terest being then ascertainable, the share of labor can likewise 
be ascertained, for that share is whatever remains of the net 
income of the productive groups. 
14 



CHAPTER VIII 

LABOR AND WAGES 

163. The " Wage Fund " Theory.— From the time of the 
earliest historic records on the subject of labor and wages up 
to the time of the inception of political economy as a branch 
of academic study the wages of the unskilled laborer were 
seldom more than enough to afford a bare subsistence for him- 
self and his offspring. Believing this condition to be the 
natural order of things, the earlier exponents of the science en- 
deavored to explain it on the basis of various theories derived 
from their observations. By the beginning of the nineteenth 
century these ideas had developed into the general conception 
of what has since been denominated as the "wage fund" 
theory, which was generally accepted up to about the middle 
of the nineteenth century, but has since been abandoned by 
almost all students of the subject. 

The wage fund theory may be briefly stated as follows : 

"Wages depend upon the demand and supply of labor. The 
supply of labor depends upon the number of laborers, and the 
demand for labor is established and measured by that portion 
of capital, namely, the "wage fund, ' ' which is available for the 
maintenance of labor or, what amounts to the same thing, for 
the payment of wages. The division of this fund among the 
laborer fixes wages, which, accordingly, rise whenever the wage 
fund is increased or the number of laborers reduced, and vice 
versa. 

When wages are less than necessary for the sustenance and 
perpetuation of the laboring class, those insufficiently nourished 
perish, so that the number of laborers is reduced, and wages 
rise. Conversely, if wages are higher, the propagation of the 
laboring class is promoted, the number of laborers increased, 
and wages are thereupon reduced. Wages therefore constantly 
tend to the bare cost of subsistence.^^ 



' Cf. Smith, pp. 49 if.; Eicardo, pp. 50 ff.; Mill, I, pp. 420 ff.; 
210 



et al. 



16*] LABOR AND WAGES 211 

When this pessimistic theory, which has given to political 
economy its appellation as the "Dismal Science," is closely 
examined, it is found that it leaves out of consideration a 
factor without which its conclusions remain indefinite. Sup- 
posing the wage fund and the number of laborers as given, 
there is nothing to indicate whether the result of the division 
represents the wages of a week, or of a month, or of any 
other definite period of time. 

Any postulated wage fund must soon be exhausted unless 
replenished. It follows that wages are determined, not by its 
absolute amount, as predicated by those writers, but by the 
rate at which its restoration proceeds. As this fund can be 
replenished only by labor, an increase of the number of 
laborers will increase not only the amount of wages constantly 
to be drawn from it, but also the amount of things constantly 
restored to it; hence an increase of the number of laborers 
cannot result in a reduction of wages. The wage problem 
hinges on the question: what portion of the value produced 
by labor accrues to the wage fund? And this brings us back 
to the question regarding the division of the total product 
between labor and capital. 

164. The Wage Theory o£ Socialism. — Karl Marx, in his 
notable work "Das Kapital," published in 1867, offers another 
demonstration of the proposition that wages tend to the bare 
cost of maintenance (366), a condition which Lasalle had 
characterized as the "Iron Law of Wages" {Das Eherne 
Lohngesetz) . This demonstration is founded on the general 
proposition that the value of a commodity is determined by 
the labor "socially necessary" for its production (63, 149), 
and from this predicate is derived the conclusion that the 
value of labor power, viewed as a commodity, depends upon 
the amount of labor necessary to maintain that power. 

The following quotations give the gist of the value theory 
propounded by Marx: 

A useful article has value only because human labour in the ab- 
stract has been embodied or materialized in it. How, then, is the 
magnitude of this value to be measured? Plainly by the quantity of 
the value-creating substance, the labour, contained in the article. The 



212 DISTRIBUTION OF WEALTH [164 

quantity ot labour, however, is measured by its duration, and labour 
time in its turn finds its standard in weeks, days and tours." 

Recognizing the manifest difference between the skilled and 
the unskilled, he explains that — 

The labour that forms the substance of value, is homogeneous 
human labour, expenditure of one uniform labour-power. The total 
labour power of society, which is embodied in the sum total of the 
value of all commodities produced by that society, counts here as one 
homogeneous mass of human labour-power, composed though it be of 
innumerable individual units. Each of those units is the same as any 
other, so far as it has the character of the average labour-power of 
society, and takes eliect as such; that is, so far as it requires for 
producing a commodity, no more time than is needed on an average, no 
more than is socially necessary."*' 

Skilled labour counts only as simple labour intensified, or rather, 
as multiplied simple labour, a given quantity of skilled being con- 
sidered equal to a greater quantity of simple labour. Experience shows 
that this reduction is constantly being made. A commodity may be 
the product of the most skilled labour, but its value, by equating it 
to the product of simple unskilled labour, represents a definite quantity 
of the latter labour alone. . . . For simplicity's sake we shall 
henceforth account every kind of labour to be unskilled, simple labour; 
by this we can do no more than save ourselves the trouble of making 
the reduction." 

This proposition is defective inasmuch as labor cannot 
serve as a measure of value (30). The time of labor cannot 
be used to measure the value of labor's products, because of 
the vast difference of quality and quantity of the product of 
different men's labor in any given time. Marx seeks to deal 
with these discrepancies by expressing the quantity of all 
kinds of labor in terms of the time of simple labor, and falls 
back on experience to obtain the rate of this reduction. He 
seems not to have realized that in this he was ignoring instead 
of solving the problem before him. Compare, for example, 
the work of a berry-picker with that of a watchmaker. Sup- 
pose a watch made in fifty hours is worth forty doUars, while 
a quart of berries picked in half an hour has a value of ten 
cents. Marx would explain this as follows : The berry-picker's 

" Marx, p. 45 ( 13 ) . Numbers in parentheses refer to German edition. 
"/6id., pp. 45-46 (13-14). ^ Ibid., pp. 51-52 (19-20). 



164] LABOR AND WAGES 213 

is simple, unskilled labor, hence the value of his product is 
measured directly by the hours spent in the picking. The 
watchmaker 's, on the other hand, is skilled labor, and his time 
must be multiplied by four, a factor found by experience. But 
unfortunately for Marx 's reasoning, this ' ' experience ' ' implies 
a knowledge of the actual market value of the products of 
the different workers. The value of the watch is forty dollars, 
and that of a quart of berries is ten cents, while the time spent 
is fifty hours and one-half of an hour respectively. The watch 
is worth four hundred times as much as a quart of berries 
and requires but one hundred times the number of hours of 
labor. It is because the watchmaker produces four times as 
much value per hour as the berry-picker that in practice his 
time of labor is worth four times as much as the berry-picker's. 
If the value of the watch and that of the berries were not 
known from experience, Marx's theory could not explain why 
the watchmaker's time should be multiplied by four or any 
other factor. By turning to experience to obtain the factor 
of his ** reduction," he virtually assumes the value of the 
sundry products of labor as known, in order to find how to 
''reduce" the time of skilled work to hours of simple labor. 
Marx's theory can be applied for finding the value of a thing 
only on condition that this value is already known, a clear case 
of arguing in a circle. 

The wage problem is treated by Marx as a special case of 
the law of value. Under the reign of capitalistic production, 
he says, the workman has no choice but to sell his "labour 
power," and then he reasons as follows (207a) : 

The value of labour-power is determined, as in the ease of every 
other commodity, by the labour-time necessary for the production, and 
consequently also the reproduction, of this special article. So far as 
it has value, it represents no more than a definite quantity of the 
average labour of society incorporated in it. Labour-power exists only 
as a capacity, or power of the living individual. Its production con- 
sequently presupposes his existence. Given the individual, the pro- 
duction of labour-power consists in his reproduction of himself or his 
maintenance. For his maintenance he requires a given quantity of the 
means of subsistence. Therefore the labour-time requisite for the pro- 
duction of labour-power reduces itself to that necessary for the pro- 



214 DISTRIBUTION OF WEALTH [164 

duction of those means of subsistence; in other words, the value of 
the labour-power is the value of the means of subsistence necessary for 
the maintenance of the labourer."" 

This proposition is just as illogical as his value theory. It 
certainly fails to explain why the watchmaker's wages should 
be four times the berry-picker's, the value of the means of 
subsistence necessary for the maintenance of both being prac- 
tically the same. Moreover, labor power can be treated as a 
commodity only if the laborer himself is a commodity, that is, 
a slave. The benefits derived from any natural force, like 
steam, or a horse, need cost no more than the production and 
utilization of the steam or of the maintenance of the horse. 
This applies also to slave labor, and for such Marx's wage 
theory is correct in every particular. 

But the time of chattel slavery is past. Unlike the horse 
or the slave, the workman of to-day is free to select his occupa- 
tion and to choose between working by himself or in co-opera- 
tion with others. He can leave his employer if another offers 
him higher wages or better treatment. When employers com- 
pete for labor's services, it is the workmen, not the masters, 
who get the benefit. It is only when there is not enough work 
to keep all workers employed that the competition among 
them for employment predominates and depresses wages. The 
workman is a free agent, except in such respects as he is 
bound in common with all other members of the community. 
Socialists may insist on calling him a wage slave, but not even 
to serve their theory can the wage earner be regarded as a 
chattel slave, to whom alone, as we have noted, Marx's theory 
applies. It is beyond reason to insist that the workmen's 
freedom can make no difference in their wages as compared 
with what they would obtain were they slaves. Under con- 
ditions of freedom a workman's wages are virtually the pro- 
ceeds of an actual sale of the fruit of his labor. A skilful, an 
industrious workman obtains higher wages than one who is 
inexperienced or indolent, even though the cost of living be 
equal for both. The purchaser of slaves may reflect on the 

"Marx, pp. 189-190 (155-156). 



165] LABOR AND WAGES 215 

cost of feeding and housing before buying them, but the 
employer, as a purchaser of the results of labor, does not 
inquire what a man needs for his living ; he pays according to 
what a man can do and how productive his services are. Wages 
are determined by factors fundamentally different from those 
which determine the cost of maintaining a horse or a slave. 
The socialistic wage theory is clearly untenable (2076). 

165. Three Forms of Wages. — The raw products of nature 
are moulded by human effort into form for human needs. 
Nature furnishes at once the material and the forces, and 
human effort, directed by human intelligence, is the agency 
by which these forces are directed and applied. 

In general, the products of nature can be made available 
for human needs only by the application of labor, and the 
utilities so won are the natural recompense of labor. This 
has been stated by Adam Smith as follows : 

The produce of labour constitutes the natural recompense or wages 
of labour."*® 

But wages can be considered in two other ways. As 
ordinarily understood, the term denotes "money wages," that 
is to say, the money paid to the worker in exchange for his 
share of the effort spent in obtaining the product ; and finally, 
the things or services bought by the worker with the money 
wages are regarded by some authorities as the "real wages" 
(284). Thus we have three different forms of wages, the first 
being the direct product of labor, the second the money ob- 
tained in exchange for that product, and the third the things 
or services obtained for the money. 

Where industry is specialized, the workman seldom desires 
a portion of the particular things which he helps to make, but 
rather his share of their value. For this reason we are not so 
much concerned with the first form of wages as with the 
second. Wages, in this sense, is what the worker obtains as 
his share of the proceeds from the sale of the product of the 
producing group. We are thus again brought face to face 

^ Smith, p. 49. 



216 DISTRIBUTION OF WEALTH [166. 167 

with the question as to what portion of the proceeds becomes 
allotted as wages, and how that allotment is shared out among 
the individual workers of the group. 

1 66. Wages Apportioned Through Competition. — Appar- 
ently the wages of employed workers are determined by the 
employer. But in reality they are the price of the workers' 
product and are therefore subject to the conditions of the 
market. The employer, in paying wages, really buys the 
product of the workers and therefore pays to each the market 
equivalent of the service received from him. Whether a 
workman is skilled or unskilled, his recompense is determined 
by supply and demand as applied to the particular service 
he renders. When an employer pays wages below the market 
value of the services rendered, the wage earners seek, and 
ultimately obtain, more remunerative employment elsewhere. 
If, on the other hand, he pays wages above the market value 
of the services obtained, he ultimately exhausts his resources 
and is compelled to reduce wages or give up his business. So 
long as both workmen and employers are free to accept or 
reject each others' terms, the force of competition regulates 
the distribution of the workers' share EF (Fig. 13) in accord- 
ance with services rendered. The freedom of change from 
one employer to another and of migration from one pursuit 
to another brings about among the workers in any productive 
group a practically just distribution of that part of the in- 
come which existing conditions allot to labor. 

The psychological element which enters into the problem, 
namely the disinclination of both workmen and employers to 
change an existing situation, can only retard, but cannot pre- 
vent an ultimate adjustment. 

167. Employers' Wages. — We have seen that the employer 
represents two independent functions. He is both manager and 
venturer (146). His income as employer consists, accordingly, 
of two items, namely manager 's wages and chance profits. At 
this stage of our discussion we are dealing only with the 
question of wages and must ignore those factors of the case 
which account for chance profits. 

The employer does not, like the employe, receive stated 



167] LABOR AND WAGES 217 

wages or salary. His recompense is a residual share (205). 
The gross receipts from the sale of the products of his group 
are distributed by him. On the one hand he pays for all 
services contributed by other groups, and on the other hand 
he pays the wages of his employes, the rent for the land occu- 
pied, the charges for the use of the capital goods and the 
interest on money borrowed. The remainder constitutes his 
income, the '"wages" of his labor. Of course, if he happens 
to be the owner of the capital employed, we must here assume 
that he is paying the corresponding charges to himself as 
capitalist or land owner. 

The diagram Fig. 13 illustrates this distribution. The 
expenses of the employer consist of the anterior charges AB, 
the profits BE due to the invested capital and the wages EF of 
the employes, the remainder FG being his wages. 

When the market rate of wages is such that the share left 
to employers is more than their efforts are really worth, that 
is, when the income of employers is out of proportion to their 
services, some of the employed are induced to go into business 
for themselves, thereby becoming employers. Consequently 
the demand for wage workers is increased, while the supply 
is reduced, causing wages to rise and the share of the em- 
ployers, as a whole, to fall until a proper adjustment is at- 
tained. And vice versa, when wages rule so high that the 
employers' share is below a proper recompense, some of them 
find that they can earn more by taking employment and do so. 
The number of employers is thereby reduced and the ruling 
rate of wages for employes falls because of the reduced de- 
mand, leaving for the remaining employers a greater share. 
The division of labor's portion EG into the shares EF and 
FG, the one going to employes, the other being left for the 
employer, is in this way adjusted to a point where the tendency 
of employes to become employers and that of employers to 
become employes are evenly balanced. 

It is thus clear that an employer's wages, even though 
they accrue to him as a residual share, depending on various 
circumstances, are yet subject, in the last analysis, to the law 
of supply and demand. 



218 DISTRIBUTION OF WEALTH [167 

There is, in the nature of things, a difference in the 
capability of different employers. Some have a high order of 
executive ability and can successfully direct the forces of a 
large organization, while others reach the limit of their direc- 
tive capacity in a concern employing but a small number of 
men. In all cases the efficiency of the workers is, to a large 
extent, dependent on the efficiency of the direction. Hence a 
difference in directive ability accounts for a far greater differ- 
ence in the net income of different groups than a like difference 
in the ability of other individual workers. The wages of 
employes being the same whatever the ability of the employer, 
every difference in the net income due to difference in manage- 
ment will appear in the employer's residual share, and a small 
percentage of increase in the efficiency of a group will increase 
the employer's share by a large percentage. This accounts for 
the well known fact that the share of the employer rises or falls 
more rapidly according to his ability than that of any other 
of the workers. 

As in every other calling, we find among employers of 
labor many who obtain more than their price limit, that is, 
what they could earn as employes. From the highest mark 
the various employers' incomes grade down toward the mar- 
gin, where their share is no greater than what they could earn 
as employes. It follows that in this relation of the employer 
to the employed the margin is determined by the supply of 
and the demand for employers' services, just as the margin 
in other lines is determined by supply and demand ; and for 
the same reason that the incomes of intra-marginal employers 
rise rapidly, those of extra-marginal employers fall as rapidly. 
If those whose business ability is inferior to that of the 
marginal manager enter the field as employers, even under 
favorable auspices, they sooner or later fail in their venture. 
That the alluring prospects attract many is evidenced by the 
fact that a large proportion of those who start in business 
find it impossible to make a success of it. And among those 
who do not fail, there are many who remain at or near the 
margin, their incomes as employers being no more, and per- 



168] LABOR AND WAGES 219 

haps even less, than what they would get if they were to 
become wage earners. 

1 68. Merchants' Wages. — A merchant's income is really 
that of an employer, for he is manager of a group that for- 
wards goods toward maturity. In the modem system of pro- 
duction it is. necessary that the products of industry be 
brought within convenient reach of the consumers, and to do 
this is the office of the merchant. 

The gross income of his business, like that of any other 
group, is divided into anterior charges and net income, and 
the latter is sub-divided into profits and wages, the profits 
going to the invested capital and the wages to the active par- 
ticipants, including himself. From his standpoint as business 
manager the anterior charges AB, Fig. 13, paid to other 
groups, the profits BE accruing to the invested capital and 
the wages EF paid to clerks, salesmen and other employes, 
are expenditures, the remainder FG being his own wages. Our 
conclusions regarding wages of organizers and employers are 
in every particular applicable to those of the merchant. 

The difference between wholesale and retail price, which 
is frequently termed ''profits," is wages, at least in part 
(140) . Some writers on economies have decried these "profits" 
of the middlemen, but these deprecations are largely due to a 
misconception. The dealer performs one of the necessary 
functions in the system of modem production. So long as he 
is not the possessor of an exclusive right, so long as others are 
free to compete with him on equal terms, his income can only 
amount to the value of the services he renders. There is, in 
fact, no such thing as a "business profit" apart from the 
forms of income previously tabulated (138). In this list 
every elementary form of income is enumerated, and "busi- 
ness profit," which is an aggregate of various elementary 
incomes, has no place in it. 

An independent item of income is sometimes accredited to 
what is known as the "good- will" of a business, but even the 
income from this source can be resolved into the elementary 
forms of our list. The conditions known as "good- will" re- 
sult from past endeavor and the reputation earned through it. 



220 DISTRIBUTION OF WEALTH [169 

Good-will therefore represents past effort and expenditure, 
and its proceeds' are to be classed as wages and returns from 
capital. 

169. Adjustment of Wages. — In view of the conclusions 
we have reached, we may now more emphatically than before 
repeat that under conditions of free competition the wages 
portion of the net income of a group is in the main shared 
equitably among all the active participants, including the 
employer. There is no room for the supposition that the em- 
ployer, or any other worker, obtains in the long run more or 
less than his just share. From the foregoing it necessarily 
follows that, contrary to a widely prevalent belief, the em- 
ployer's services are not overpaid at the expense of the em- 
ployed, and that the wages system has no inherent tendency 
toward inequity. But we have yet to analyze how the net in- 
come of a group is divided into wages and capital profits, 
and when we fully understand the causes which regulate this 
division, we shall see that it is the capitalist and not the 
employer who gets more than an equitable share. 



CHAPTER IX 
LAND AND RENT 

170. Land the Prime Source of Wealth. — The primary 
source of all wealth is nature itself. The materials which are 
turned into commodities by the various processes of production 
are products of nature. The forces which become the servants 
of man as he utilizes them in these processes are forces of 
nature. 

Just as all kinds of productive efforts are included in the 
comprehensive term ''labor," so are all natural sources of the 
materials and of the forces requisite to production included 
in the term "land." This term, in the economic sense, there- 
fore embraces much more than what is ordinarily understood 
by it. It embraces not only arable soil, building sites and 
forests, but also mines, waterfalls, fishing grounds and the 
like. 

In order to obtain raw materials from land, it is generally 
necessary to perform more or less preparatory labor. Before 
wheat can be reaped, the land must be plowed and fertilized 
and the seed sown. Provision must be made to store the grain 
for protection against rain and storm. Coal is obtained prin- 
cipally by first sinking shafts and installing mining machinery. 
Inasmuch as most of the results of this work are inseparable 
from the land, those who perform the work and those who 
furnish the necessary appliances can be protected in the 
ownership of those results only by a concession of the ex- 
clusive right to the occupancy of the land. For this reason 
land has become private property. 

171. Land Distinguished from Improvements Thereon. 
— Land, as a factor of production, presents a feature which is 
possessed by no other form of capital. The labor required for 
the production of like things in different localities is not equal, 
but depends upon location and fertility of the land. Where 
these characteristics are favorable, the same results can be ob- 

221 



222 DISTRIBUTION OF WEALTH [172 

tained easier than elsewhere. It is for this reason that the 
value of products, according as they are obtained from one or 
another piece of land, may exceed, or be equal to, or even fall 
below the normal charges for the efforts exerted and the 
capital goods employed in production. Of course, where it 
is found that the value of the products is in the average less 
than the cost of their production, this land will no longer be 
used for that particular purpose. But where the products 
obtained have a value exceeding this cost, the excess con- 
stitutes a profit to which the term "rent," in the sense of 
"economic rent" as distinguished from "gross rent," has 
been applied (139). 

If land which yields such profit, or rent, is offered for 
lease, competition obliges the lessor to pay for its use a charge 
practically equal to this rent (323). And if it is offered for 
sale, competition for its ownership raises its value to a point 
proportionate to the profit yielded. It is the profit-yielding 
feature of land that gives it a market value. 

In studying the nature of land values, the value of the 
preparations for its use, that is to say, the "improvements" 
made upon the land, must be considered separately from that 
of the land itself. The value of real estate is therefore made 
up of two items, namely, that of the land and that of the 
improvements. We are at this point concerned only with rent 
and with the value of land apart from that of improvements 
(173). The latter are to be considered as capital goods, the 
economic status of which will be discussed in the next chapter. 

In some instances improvements become so incorporated in 
the land that the distinction we have here in view partly or 
wholly disappears. This is the case in clearing land of rocks, 
or reclaiming it from swamps, and so forth. We shall revert 
to this feature of the subject when the taxation of the land is 
to be considered (331). 

172. Ricardo's Law of Rent. — As regards the causes that 
bring about and regulate rent, there is practically no differ- 
ence of opinion among modern economists. All agree upon 
the main points of the proposition known as "Ricardo's Law 



172] LAND AND RENT 223 

of Rent" (130). Since its promulgation, in the early part 
of the nineteenth century, only a few unavailing attempts 
have been made to discredit it, and these have resulted merely 
in confirming its truth. Such divergence of opinion as still 
remains relates only to minor details. 

The nature of rent and the law that regulates it were 
recognized, in a measure, by some writers before the close of 
the eighteenth century, but since Ricardo was the first to 
propound the law in a well defined and comprehensive form, 
it is now distinguished by his name. A brief excerpt of his 
presentation is here quoted : 

On the first settling of a country, in which there is an abundance 
of rich and fertile land, a very small portion of which is required to be 
cultivated for the support of the actual population, . . . there will 
be no rent; for no one would pay for the use of land when there is an 
abundant quantity not yet appropriated, and, therefore, at the dis- 
posal of whosoever might choose to cultivate it. 

. . . If all land had the same properties, if it were unlimited 
in quantity, and uniform in quality, no charge could be made for its 
use, unless where it possessed peculiar advantages of situation. It 
is only, then, because land is not unlimited in quantity and uniform in 
quality, and because, in the progress of population, land of an inferior 
quality, or less advantageously situated, is called into cultivation, that 
rent is ever paid for the use of it. When, in the progress of society, 
land of the second degree of fertility is taken into cultivation, rent 
immediately commences on that of the first quality, and the amount of 
that rent will depend on the difterence in quality of these two portions 
of land. 

When land of the third quality is taken into cultivation, rent im- 
mediately commences on the second, and it is regulated as before, by 
the difl'erence of their productive powers. At the same time, the rent 
of the first quality will rise, for that must always be above the rent 
of the second, by the difference between the produce which they yield 
with a given quantity of capital and labour. With every step in the 
progress of population, which shall oblige a country to have recourse 
to land of a worse quality, to enable it to raise its supply of food, rent 
on all the more fertile land, will rise. 

Thus suppose land — Nos. 1, 2, 3 — to yield, with an equal employ- 
ment of capital and labour, a net produce of 100, 90, and 80 quarters 
of corn. In a new country, where there is an abundance of fertile land 
compared with the population, and where therefore it is only neces- 
sary to cultivate No. 1, the whole net produce will belong to the cul- 
tivator, and will be the profits of the stock which he advances. As soon 



224 DISTRIBUTION OF WEALTH [173 

as population had so far increased as to make it necessary to cultivate 
No. 2, from which 90 quarters only can be obtained after supporting 
the labourers, rent would commence on No. 1, ... In the same 
manner it might be shown that when No. 3 is brought into cultivation, 
the rent of No. 2 must be ten quarters, or the value of ten quarters, 
while the rent of No. 1 would rise to 20 quarters; for the cultivator of 
No. 3 would have the same profits whether he paid twenty quarters for 
the rent of No. 1, ten quarters for the rent of No. 2, or cultivated 
No. 3 free of all rent." 

In following up his argument, Ricardo proceeds : 

The reason, then, why raw produce rises in comparative value, is 
because more labour is employed in the production of the last portion 
obtained, and not because a rent is paid to the landlord. The value of 
corn is regulated by the quantity of labour bestowed on its production 
on that quality of land, or with that portion of capital, which pays no 
rent. Corn is not high because rent is paid, but a rent is paid because 
corn is high (359) ; and it has been justly observed, that no reduction 
would take place in the price of corn, although landlords should forego 
the whole of their rent. Such a measure would only enable some 
farmers to live like gentlemen, but would not diminish the quantity of 
labour necessary to raise the raw produce on the least productive land 
in cultivation.^* 

173. Graphical Representation of Ricardo's Law. — In the 
proposition so clearly stated by Ricardo the reader will readily 
recognize the principle which underlies the theory of value 
discussed in a preceding chapter (56-61). Ricardo has really 
paved the way for a clear understanding of the actions and 
reactions by which market values are regulated. He recog- 
nized the principle of the varying cost of production which 
forms the basis of what we called the "sellers' price limit" 
and represented by a rising curve. Later writers recognized 
a similar variation in regard to the desire for any given 
product and supplied the final link necessary to formulate the 
law of value. 

If the item of rent is left out in figuring the cost of pro- 
duction (61), this cost becomes a varying quantity that can 
be represented by a rising curve, and the graphic method for 
illustrating the interaction of supply and demand can then be 
used advantageously to illustrate the law of rent. 

"Eicardo, pp. 35-36. "Ibid., pp. 38-39. 



173] LAND AND RENT 225 

The owner of a piece of land will not put it to use unless 
the market price of his products at least covers the three items : 
cost of supplies, current charges for the capital goods em- 
ployed and value of his labor and that of those whom he may 
employ. This sum, then, is ''cost of production" from the 
standpoint of the landowner and becomes his price limit as a 
seller of his products. This price limit is different for the 
owners of different pieces of land, for the cost of production 
in each case is affected by the varying fertility and location 
of the land. 

Now let us suppose that the curve S8' of Fig. 20 repre- 
sents the possible supply of a certain product that can be 
furnished to a given market, the elements of this supply being 
ordered in rising series of their respective cost or ' ' price 
limit," and let us further assume that the curve DD' repre- 
sents the demand for this same product. The intersection of 
these two curves will then locate the marginal point a. Accord- 
ingly, the ruling price of the entire supply of the market will 
adjust itself to the rate Op, no matter what difference there 
may be in the cost of producing the separate elements, and 
only those elements of the possible supply as are at and inside 
of the margin a will be continuously produced and actually 
supplied in the market. 

Concentrating our attention on the element q\ it can be 
seen that the proceeds q'r' from its sale are divided into two 
parts, q's' and s'r', of which the first consists of cost of supplies, 
returns of capital goods and wages of labor, while the second 
constitutes the "rent" afforded by the land from which the 
element q' is obtained (323). This profit is primarily ac- 
quired by the user or cultivator of the land when he sells his 
products in the market, but if tenant, he pays it over to the 
landlord for the use of the land. 

Land rented to a tenant usually carries improvements. If 
so, the landlord really supplies at least a portion of the capital 
goods used by the tenant in his work (171). In this case the 
stipulated rent paid by the tenant contains two items in addi- 
tion to the economic rent, which are (1) reimbursement for 
deterioration of the improvements, viewed as means; of pro- 
15 



226 DISTRIBUTION OF WEALTH [174 

duction, and (2) current returns for the use of the improve- 
ments, viewed as capital goods. It will be recalled that the 
gross income gV is composed of the rent sV and of the cost 
q's', embracing cost of supplies, returns of capital goods and 
wages of labor. The first of these items, reimbursement for 
deterioration, is really a portion of the cost of supplies, while 
the second item is part of the returns of capital goods. Hence 
it is to be seen that after paying the stipulated rent, the 
tenant's residual share is composed of wages of his labor and 
that of his employes, and the returns due to that part of the 
capital which he himself furnishes. 

174. Misinterpretations of Ricardo's Law. — The objec- 
tions that have been raised against Ricardo's law of rent are 
mostly based on a misinterpretation of his statement of the 
law or on a too narrow construction of it. His land No. 1 is 
obviously that land, whatever its area may be, from which, 
under the existing circumstances, the greatest amount of pro- 
duce can be obtained with a given amount of labor. It is not 
necessarily the land which yields the greatest crop per acre. 

By showing that rich land often requires great effort to 
clear, drain and prepare it for cultivation, and that the early 
settlers of a country, instead of cultivating the rich river 
bottoms, raised their first crops on the hillsides which have a 
natural drainage, Henry C. Carey attempted to refute 
Ricardo's law. But, as a matter of fact, this illustration con- 
stitutes a confirmation rather than a refutation. The settlers 
selected the land which, under the circumstances, yielded the 
greatest crop with the least effort. 

In many respects the illustration given by Ricardo must 
be interpreted liberally and with due regard to general con- 
ditions. For instance, if different fields yield corn of different 
quality, it stands to reason that the "quartet's" used for 
measuring the poorer grades should be conceived so much en- 
larged that "equivalent" rather than "equal" amounts of 
the different grades will be compared. Ricardo gives the gist 
of the law in terms which, where occasion requires, must be 
recast so as to be adapted to the case in question. 

That the term "fertility" may have reference to mineral 



175] LAND AND RENT 227 

as well as agricultural land was also clearly shown by Ricardo. 
The cost of mining equal quantities in different mines depends 
on a number of conditions, all of which have some influence 
on the profit that may accrue to the mine owner. 

Nor should fertility alone be considered. Wheat raised on 
more fertile land which happens to be less advantageously 
situated may cost more by the time it is brought to market 
than that obtained from less fertile land so located that less 
labor is required to bring it to market. In many cases location 
is indeed the only advantage utilized, as is the case with land 
in cities. In a store located in the business centre of a city 
more and larger sales can be effected with equal effort, or, 
what is the same, at equal cost, than in smaller stores in out- 
lying districts. The labor of the salesman is more ' ' fruitful, ' ' 
so to speak. So do advantages from location accrue to bankers, 
manufacturers, shippers and others. ''Fertility" then loses 
its literal significance, and commercial and industrial ad- 
vantages take the place of agricultural advantages. It mat- 
ters not whether the cost of production is influenced through 
varying fertility or varying location, whether land is used 
for agriculture or for mining, for commercial or for in- 
dustrial purposes, the law of rent is the same. Rent is always 
the value of the advantage derived from the possession of 
land, a value which, if the occupant is a tenant, goes in general 
to the landowner with the stipulated rent. 

175. The Margin of Cultivation. — The objection which 
has been urged most persistently against Ricardo 's law is based 
on a denial of the existence of "no-rent" land, namely, land 
the use of which can be obtained without the payment of rent, 
land which has not yet been brought into use because of the 
limited demand for its products. If it were true that there 
is no ultra-marginal land, or that there is no point of diminish- 
ing returns, Ricardo 's law of rent would have no basis, for we 
can measure the advantages which one piece of land affords 
only by adopting as a standard of comparison some other 
land, the advantages of which are taken as zero. 

There is no justification for denying the existence of "no- 



228 DISTRIBUTION OF WEALTH [i76 

rent" land while there are vast tracts of land still uncultivated 
in various quarters of the globe, or while it is still possible to 
reclaim land from swamps or seas, or even as long as the 
intensity of cultivation of land already in use can be still 
further increased (178). 

The denial of the existence of no-rent land is seemingly 
justified by the fact that land which is at the margin for some 
particular use is not rent-free. Thus suburban land which to 
all appearances is just beyond the margin of urban utility, 
even though at the moment lying idle, cannot be obtained 
without the pajonent of rent. We shall presently see, however, 
that this affords no basis for the denial, and that this con- 
dition is quite consistent with the theory of rent. 

176. Cumulative Rent. — Land is adapted for various 
alternate uses. It may be used for grazing, for growing 
wheat, for raising garden truck, for residences, or for manu- 
facturing, bank or office buildings. These different uses range 
themselves in the order of their importance about market 
centres. In the heart of a city the demand for land for mer- 
cantile use is greater than for any other purpose. In the zone 
surrounding the centre the prevailing demand is for factories 
and dwellings. At a still greater distance the margin for this 
use is passed and truck farming and other forms of intensive 
culture is in place. Then comes land given to extensive farm- 
ing, and finally, farthest away, cattle ranges and woodlands 
will be found, interspersed with areas wholly unused. 

In our study of this topic complications can be minimized 
if we at first apply the argument to a single market centre 
and assume that the surrounding land is throughout of equal 
fertility and that the cost of transportation from all directions 
to the centre is proportionate only to distance. Under these 
conditions the different uses to which the land can be put 
naturally range themselves in a series of concentric zones 
around the market. The cattle raiser occupies the most dis- 
tant land, bordering on the actual margin of cultivation. 
Those stretches of this land which are nearest to the market 
centre are slightly preferable to the more outlying parts and 
are therefore slightly rent-bearing, hence the line where agri- 



177] LAND AND RENT 229 

cultural use begins is already a zone of land that can no 
longer be had without paying rent, and the margin of farm- 
ing is not no-rent land. The marginal farmer must compete 
with the intra-marginal rancher.* 

The farms that are nearer the market are preferred to those 
that are more distant and therefore yield a higher rent. Thus 
it happens that the marginal truck farmer must pay a rent 
equal to that returned by the most favorably located farm land. 
In short, the land lying at the margin of any one of the uses 
affords a rent consisting of the cumulation of the rent afforded 
by the less important uses of the land which lies between this 
margin and the outermost margin of cultivation. 

But the uniformity in the characteristics of land which we 
have assumed in the above illustration does not really exist. 
The concentric arrangement of the several margins is there- 
fore to be taken in a figurative sense. The lines by which the 
several uses are separated are in reality exceedingly irregular 
for quite obvious reasons. The markets for many products 
are actually outside of their margin of cultivation, as in the 
case of tropical fruit, spices and mineral products. We further- 
more must consider that the number of markets is practically 
unlimited, each competing with its neighbor for the products 
of the adjacent lands, and that for this reason the marginal 
lines are completely interwoven. For all that, the general 
theory of rent, and, coincidently, that of cumulative rent, is 
not thereby vitiated, but only enveloped in a multitude of 
complications. 

177. Intensity of Cultivation. — The yield of any piece of 
land is not a fixed quantity, but depends on several conditions, 
among others on the amount of labor and capital applied to its 
cultivation. Land can be cultivated with greater or less "in- 
tensity," and for each degree of cultivation its yield is 
different. 

For the present we shall leave out of consideration the 
effect of all other variable factors, such as the weather and 
the more or less intelligent management, by assuming these 

a Vf. Seager, pp. 230-232. 



230 DISTRIBUTION OF WEALTH [i78 

to be normal. The latter variations affect principally chance 
profits in one case, and manager's wages in the other. 

The yield of land is increased with the application of more 
labor and capital, or, to put it briefly, of greater effort. But 
it does not increase in the same proportion as the effort. The 
productivity of land holds a relation to the intensity of cul- 
tivation similar to that existing between productivity of labor 
and amount of capital. The increase of productivity of land 
does not keep pace with that of effort applied to it, the 
progression in that respect being more or less similar to the 
curve shown in Fig, 14, illustrating the relation of capital to 
the productivity of labor. 

In the present study, however, the diagram will be more 
instructive if the yield is presented, as in Fig. 16, in a differ- 
entiated instead of an integrated form. Land cultivated with 
little effort will bring forth little; but each additional effort 
will increase the output. Imagine successive instalments of 
effort, Oa, ab, he, and so forth, to be laid off on the horizontal 
axis of Fig. 21, and the output of each separate instalment to 
be laid off in the vertical direction, so that the yield of the 
first instalment of effort Oa is represented by the area Oaa'Y, 
the yield of the second instalment ah by ahh'a', etc., the curve 
YY' denoting the land's productivity. 

Figuratively speaking, we may consider the piece of land 
under consideration to be composed of a number of super- 
posed layers of land — successive stories, so to speak — each of 
which can take up no more than one of the increments of 
effort. The yield of the first layer, when put under cultiva- 
tion, would equal the area Oaa'Y, that of the second ahh'a', 
and so on, each succeeding layer yielding less than the pre- 
ceding one. 

178. The Point of Diminishing Returns. — Having assumed 
all the successive instalments of effort and, accordingly, of 
cost, to be equal, this cost can be represented by the ordinate 
of the horizontal line CC. The diagram then elucidates the 
fact that the instalment cd is the last one which produces a 
yield greater than its cost. The point d is manifestly the point 
of ' ' diminishing returns ' ' and delimits the most advantageous 



179] LAND AND RENT 231 

intensity of cultivation. The area Odd'C then represents the 
value of the total efforts, while the area Odd'Y measures the 
value of the total yield, and, accordingly, the area Cd'Y, which 
indicates the excess of the value of the product over its cost, 
represents the rent yielded by the piece of land. 

It is now seen that the total value of the produce of the 
land in question, represented by the area Odd'Y, is divided 
into two parts. Of these, the part Odd'C represents the cost 
of producing the goods, comprising cost of supplies, value of 
labor and charges for the use of the capital other than land. 
The other part, Cd'Y, goes as rent to the landlord for the use 
of the land (185). 

Now suppose that the demand for the produce of the land 
is increased, say through an increase of population. In con- 
sequence the value of the produce rises and is then represented 
by the curve ZZ'. It then pays to increase the intensity of 
cultivation to the point /. To use our figure of speech, two 
more layers or ''stories" are brought into use and the yield 
is increased not only in value, but also in absolute quantity. It 
is also apparent that the rent of the land rises from Cd'Y to 
Cf'Z. 

Before the increase of demand as here assumed takes place, 
the layers or "stories" de and ef are beyond the margin of 
cultivation, since the value of their yield is then less than the 
cost of cultivation. By an increase of the demand they are 
brought into requisition, just as any previously existing ultra- 
marginal land would be put to use under like circumstances. 
From this viewpoint it can be seen that there is marginal land 
(175), at least in a figurative sense, in the midst of highly 
cultivated sections, nay, in the very business centres of cities, 
and these marginal sections are free even of cumulative rent. 
The erection of lofty office buildings is nothing else than bring- 
ing into requisition the marginal layers or "stories" — an ex- 
pression which in this case is literally applicable — of the land, 
by increasing the ' ' intensity of cultivation. ' ' 

179. The Personal Factor in Rent. — The yield of land, 
and with it the rent, is influenced not only by the intensity of 



232 DISTRIBUTION OF WEALTH [179 

cultivation, but also by the personal ability and foresight of 
the occupant, both as regards the selection of the special use to 
which the land is to be put and the intelligence and energy 
with which the productive efforts are applied. 

An acre of land in the centre of the city of New York, if 
used for raising potatoes, would bring materially less rent 
than if used for office buildings or stores. An equal area of 
land in the country, say a hundred miles from New York, 
would, on the contrary, bring a higher rent as a potato patch 
than as a store site. And if this acre were in the north of 
Texas, the distance of the nearest market would even forbid 
the growing of potatoes, the land being available only for the 
lowest degree of cultivation, such as the grazing of cattle. 
The judicious selection of the use of any piece of land, accord- 
ing to circumstances, is an essential factor in obtaining the 
highest possible rent from it. 

But even as regards a given use, the returns obtainable 
depend further on the personal ability of the user. Taking an 
acre best adapted for raising potatoes, it is found that one man 
is able to raise a larger crop than another, because of difference 
in intelligence, diligence and skill. 

Among those desirous of utilizing any piece of land there 
are always some who can put it to better use than others, and 
these can always outbid their competitors. For the land of a 
commercial or industrial centre the banker, the merchant, the 
manufacturer are the highest bidders, and when these have 
secured their location, they are eliminated as competitors for 
the use of the more distant land which is open to competition 
among the remaining competitors. It is in this way that under 
the impulse of competition the occupancy of land is so ad- 
justed among the different possible occupants that the land 
finds its most productive use and accordingly yields the 
highest rent, taking into account the different capabilities of 
those different occupants. 

It must, of course, be understood that we are here dealing 
only with general tendencies. The theoretical result is not 
necessarily realized in each separate case. Yet, generally 
speaking, the facts are in accord with this theory. The most 



180] LAND AND RENT 233 

advantageous land returns a particularly high, rent because 
it is being put to the most advantageous use by those most 
capable of doing so, the less advantageous land being left to 
those who, in their turn, can get the most out of it. 

i8o. The Source of Rent. — Rent, like wages, can be con- 
ceived in three forms. Of two settlers one may have taken up 
land that is more fertile than that taken up by the other, and 
who therefore can maintain his existence with less effort. He 
obtains rent in the form of greater comforts of life. This may 
be regarded as the basic form of rent. The second develops 
when these settlers as farmers bring their produce to market. 
Supposing the settler on the poorer land to be at the margin 
of cultivation, he will obtain a price for his produce which 
pays him only as much as he could earn at market rate of 
wages. His more fortunate neighbor, inasmuch as he can 
grow a greater quantity with the same amount of effort, can 
sell his produce at a price that nets him an income exceeding 
what he could earn as a farm hand. This excess, the second 
form of rent, appears as a definite profit, usually in the form 
of money. And if the owner of the intra-marginal land 
leases it to a tenant, he obtains rent in its third form, namely 
as a stipulated periodic payment of money or its equivalent. 
At this point we are concerned mainly with rent in its second 
form, namely in the form of a share of the gross income of a 
productive group, and with the way in which that share is 
determined. 

The process by which rent, viewed as a share of the total 
value of the produce of land, is determined, has been clearly 
set forth by Ricardo. Products obtained from intra-marginal 
land require less labor to prepare for the market than equal 
products obtained from land at the margin of production (7). 
But in the market equal products, however obtained, command 
an equal price, a price determined by the marginal cost. The 
excess of the price over the cost of things produced on intra- 
marginal land is rent. It is due to the advantages afforded 
by conditions of fertility and location of the land (154) and 
accrues in the first place to the user of the land. 



234 DISTRIBUTION OF WEALTH [180 

By way of illustration we may assume that for obtaining a 
given amount of produce, the cost on land No. 1 is $50, on 
land No. 2 it is $60, and on land No. 3 it is $70. It is under- 
stood that cost is here meant to embrace all anterior charges, 
normal wages of labor, including that of superintendence, and 
current interest on the capital goods employed, but no charges 
for the use of land. 

If now the demand for the produce of the land is such 
that the yields of land Nos. 1, 2 and 3 will just fully supply it, 
then land No. 3 is at the margin and the market price of the 
given amount of the produce is $70 (62). The cultivators of 
land Nos. 1 and 2, in producing and selling the given amount, 
accordingly score a profit of $20 and $10, respectively. 

Those who buy the produce of land No. 1 give $70 in ex- 
change for that which normally costs only $50 to produce. 
The difference, namely, $20, is the rent realized through the 
sale of the given amount of the produce of land No. 1. These 
$20 represent just so much of the value of the purchaser's 
labor. It is therefore manifest that rent is a value furnished, 
not by the producers of the goods sold, but by the purchasers 
of those goods (323, 370). 

Where land is used for industrial and commercial pursuits, 
equal amounts of effort have greater or less effect, according 
to location and surroundings ; hence the above conclusion is 
true for such land as well as for agricultural land. 

Reverting to diagram Fig. 20 it will be seen that by the 
sale of the total quantity Oq of the produce at the normal price 
qa, the cultivators of the land from which the various elements 
of the supply come receive value represented by the area Oqap, 
while, as will be understood by remembering that the effort of 
producing the element q' is represented by q's' — they actually 
expend efforts of a value equal to the area OqaS. The sellers 
furnish services measured by the area OqaS, while the pur- 
chasers furnish services measured by the area Oqap, hence the 
difference measured by the area Sap is an excess of services 
rendered by the purchasers, and this excess constitutes rent. 
Rent, then, is the result of an exchange of unequal services. 
It is acquired by the owners of the land, but is produced by the 



181] LAND AND RENT ' 235 

efforts of the purchasers of the products and, accordingly, by 
the community in general. The significance of this fact will 
be considered later. 

i8i. Land Values. — The portion BE, Fig. 13, of the net 
income of a productive group which goes to capital is ordi- 
narily divided into at least two parts, namely rent BC and 
capital interest CE, of which, in many cases, a portion DE 
accrues as interest to lenders of money. The conditions which 
determine the first of these parts have now been fully dis- 
cussed. But, as stated before (131), we must not only find 
why each one of the three forms of capital brings an income, 
but also why it is that the rate of this income is practically 
equal for all three forms. To elucidate this in relation to 
land, we must ascertain why it is that the ratio of the land- 
owner 's gains to the value of his land agrees with the current 
rate of interest. To this end we must now seek for the causes 
which determine the value of land. 

Since land is not produced by labor, we cannot arrive at 
its value through the "marginal effort" of its production. 
Nor can we turn to ''final utility," since land devoted to 
industry and commerce is not in course of consumption, and 
its utility exists only in a latent or potential state. We must 
have recourse to the method of "capitalization" (65), by 
comparison of land with money or with capital goods on the 
basis of the one property which they have in common, namely 
the power of bringing an income (190). 

It has indeed long been recognized that the value of land 
depends upon two items, namely, the rent it returns and the 
current rate of interest, and this relation is usually put in the 
form of the statement that the value of land equals the rent 
capitalized at the current rate of interest. 

This statement of the case needs qualification in the light 
of two considerations. In the first place, experience tells that 
land is subject to continued changes of value, the rule being 
that land values steadily increase. This increase is known as 
the "unearned increment." The owner of land derives a 
profit from this source as well as from rent. Accordingly, the 



236 DISTRIBUTION OF WEALTH [i8i 

gross gain derived from land is increment in addition to rent. 

In the second place, real estate is subject to a tax, and 
where this tax is in proportion to the value of the estate, the 
rate of taxation has a reacting influence on the value of the 
land. The value of real estate consists of the value of the 
land and that of the improvements. Since the latter must be 
regarded as capital goods, the tax apportioned to them must 
here be left out of account. But that portion of the tax im- 
posed on the value of the land has a direct bearing on the 
subject before us, as it reduces the profits of the landowner. 

The net profits derived from land are therefore equal to 
rent plus unearned increment minus tax, or, putting it in 
algebraic form, R -\- U — T, where R is the annual rent, U 
the annual unearned increment and T the annual tax assessed 
on the land. The landowner retains only a portion of the 
gross profits. 

The unearned increment is governed principally by three 
conditions: (1) by the gradual increase of rent, for the most 
part due to the growth of population, to the increase of 
means of communication and to other conditions that make 
the location more advantageous; (2) by the gradual change 
that takes place in the rate of interest which, according to 
experience, has been generally falling; and (3) by a possible 
change in the rate of land taxation. A study of the operation 
of these three causes would lead to complications which for 
our purpose may be avoided by considering, in each specific 
case, the unearned increment as a known quantity, indicated 
by past experience. 

There are cases of land values which are actually falling. 
In such cases the unearned increment has to be treated as a 
minus quantity. 

Furthermore, it may also happen that the value of land, 
expressed in dollars, rises or falls as a result of changes in the 
value of gold in relation to other things generally. In such 
ease a rise would be merely apparent and would not be an 
"unearned" increment at all, nor would such a fall in value 
be other than merely nominal. 



182] LAND AND RENT 237 

182. The Law of Land Value. — The proposition that land 
values equal the rent capitalized at the current rate of in- 
terest is obviously not correct. To put it right, "net profits" 
must be substituted for "rent" in the statement. The owner 
of land will sell it only for a sum of money which, when loaned 
or invested, brings returns equal to these net gains. 

This law of land values can be expressed algebraically. 
Let V be the value of the land, E the annual rent, U the annual 
unearned increment, T the annual tax, I the landowner's 
profit, * the current rate per cent, of pure interest and t the 
actual rate per cent, of land taxation (327, 328a). This last 
rate, it should be observed, is not necessarily the nominal rate 
of taxation. "Where it is customary to assess land a certain 
percentage below the actual market value, the factor t should 
be obtained by reducing the nominal tax rate in the same pro- 
portion, so that this corrected factor represents the ratio of 
the tax actually assessed to the actual selling value of the land. 

The value of land may then be expressed by the formula: 

(1) V = 100(B + U — T)^i. 

By substituting for T its value, t XV, and solving the 
equation for V, it will be found that : 

(2) V = 100(B-\-U)-^(i-\-t). 

This last equation may be interpreted as follows: Land 
values tend to equal the gross gains B -\- U, capitalized at a 
rate obtained by adding the actual rate of taxation to the 
current rate of pure interest. 

An illustration will make this clear. Suppose a piece of 
land to bring an annual rent of $900, while the annual un- 
earned increment amounts to $300. Let the current rate i of 
pure interest be 4 per cent, and the rate t of land tax 2 per 
cent. According to the last equation the value of this land 
will be $1200 capitalized at 4 + 2, that is, at 6 per cent., 
which will make the value $20,000 (3286). The tax, at the 
rate of 2 per cent., will then be $400 and the net gain accruing 
to the landowner $800, and this, in fact, represents an income 
of 4 per cent, on an investment of $20,000. 



238 DISTRIBUTION OF WEALTH [183. 184 

183. Speculative Land Value. — If we had assumed the 
simpler case, in which the land value is stationary and the 
rent of $900 the only source of gain from the land, we should 
have found that the value of this piece of land would be 
$15,000 instead of $20,000 (278, 328). The excess of the 
value of the first over that of the second case, namely $5000, 
has been termed "speculative land value" (361), as it cannot 
be accounted for by the rent alone, but is due to an expected 
increase of value likely to occur in the future. 

It is quite consistent with the result of our analysis to 
consider land values as being made up of two items, namely, 
the value directly due to the rent and that due to the unearned 
increment. In the above illustration the first item would be 
equal to the rent of $900 capitalized at 6 per cent., or $15,000, 
while the second item would be normal increment of $300 
treated in the same way, resulting in $5000. 

184. Division of the Gross Profits Derived from Land. — 
From formula (2) we can derive further information. The 
net profit / of the landowner equals i per cent., or i one- 
hundredths, of the value of the land, namely : 

(3) I = i(B + U)---(i + t), 

and the land tax equals t per cent, of the same value, namely : 

(4 T = t(R^U)^(i + t), 

and this in our illustration yields $800 and $400, respectively. 
We find, accordingly, that the total gross gain derived from 
land, namely B -\-U,is divided into two shares, I and T, which 
bear the same ratio to one another as the current rate of in- 
terest i bears to the rate of taxation t. The one constitutes the 
gain of the landowner, the other an income of the community. 
It follows that the gross profit yielded by land, namely rent 
plus increment, is really shared between landowner and com- 
munity, the respective parts having the same ratio as that 
which the current interest rate bears to the tax rate. This 
being true for the sum B -\-TJ, it is also true if the two items 
B and TJ are considered separately (324, 325, 327). 



185] LAND AND RENT 239 

The value here discussed is, of course, the value of the land 
independent of the improvements that may be located on it. 

It is scarcely possible to reiterate too often that our reason- 
ing relates to general tendencies. In individual cases exchanges 
may be effected at rates more or less departing from the results 
indicated by these formulas. 

185. Summary. — In our quest for the causes which control 
the division of the net income BO, Fig. 13, of productive 
groups, we have seen how one of the items of the division, 
namely the rent BC, is definitely determined. Fig. 20 clearly 
illustrates the process by which the net income of a group is 
divided into two parts. To illustrate: the net income q'r' of 
the group furnishing the portion q' falls into two parts, of 
which s'r' goes to the landowner (178),°'-' the other part, q's' 
being left to pay for the services of the other forms of capital 
and of labor. The economic forces which determine this 
division are universally recognized. Of the three shares : rent, 
capital returns and wages, the first, namely rent, represented 
by 50 in Fig. 13, equals the advantages which the land em- 
ployed affords over marginal land, and therefore depends on 
relative fertility and advantages of location. 

We have also found why it is that the rate of the total net 
gains of land ownership in relation to the value of the land 
itself is as a rule the same as the current rate of interest (131, 
267), and that the reason lies in the fact that the value of 
land adapts itself to the interest rate, rising as the rate of 
interest falls, and vice versa. But what it is that determines 
the rate of interest we have yet to discover, and until this is 
found we cannot bring our analysis of land values to a definite 
conclusion (323). 

°*The fact that the landowner must subsequently share his income 
s'r' with the community through taxation of the land cannot react on 
the division of the net income q'r' of the group into the two shares q's' 
and s'r'. 



CHAPTER X 
CAPITAL GOODS AND CAPITAL RETURNS 

1 86. Capital Interest. — A full understandiiig of capital 
profits cannot be reached until the causes for all three forms 
of these profits — rent, capital interest, and money interest — 
have been found. The rent-producing power has been cor- 
rectly traced to its origin by Ricardo 's law of rent, and with a 
view of learning whether the power of capital goods and of 
money to command interest has been similarly traced, we shall 
now briefly review some of the principal theories that have 
been advanced to explain interest. 

We know from experience that capital goods in productive 
use yield an income to their owner. The value of things pro- 
duced by labor with the aid of capital commonly exceeds the 
cost of their production, when that cost is considered from 
the standpoint of the owner of the capital goods, that is, when 
"cost" includes all charges for supplies, for labor and for 
land, in short, all items of cost except charges for the use of 
the capital goods employed (61). The excess of the value of 
the product over this cost constitutes the profits or returns 
that accrue to capital goods (209). 

In the present discourse capital goods must be understood 
as comprising not only means of production, but goods in 
course of production as well; not only looms, but yarns also 
(132, 191). 

In view of the contentions which so frequently arise be- 
tween labor and capital regarding the proper sharing of the 
value of their joint products, it is important that the cause 
which determines the rate of this division be thoroughly 
understood. 

187. Distinction of Capital Interest and Rent. — The line 
of reasoning by which rent is explained is apparently not 
applicable to account for the profits that accrue to capital 
goods (258), Land exists in various grades — good, medium 

240 



188] CAPITAL GOODS AND RETURNS 241 

and poor — and the grade of land is not dependent on the 
efforts of the owner. No amount of cultivation, however in- 
telligently directed, can make an acre of land in the deserts of 
Arizona return as much rent as an acre in the centre of the 
city of New York. Capital goods, on the other hand, are 
neither dependent on the fickle bounty of nature, nor are they 
held down to a definite location. Differences in the income 
obtained through their use are due principally to their more 
or less intelligent utilization, and such differences affect wages 
of the employer rather than returns accruing to the capitalist. 
An analogy between capital returns and rent would therefore 
seem to be out of the question. 

1 88. Distinction of Capital Interest and Money Interest. 
— It is generally taken for granted that the lender of money 
with which capital goods are bought is properly entitled to 
the profits, or a share of the profits, obtained through the 
employment of those capital goods, on the ground that the 
lender of the money is really the lender of the capital. But 
when it is considered that the money itself is always idle 
capital and has no capacity for production (134), the proposi- 
tion that these capital returns, or any portion of them, are 
payable as interest to the lender of money, simply because 
capital goods bought with this money can be made to yield 
returns, is no more self-evident than would be a proposition 
that the profits of a factory should be turned over to the 
supplier of lubricating oil, because without lubricant of some 
kind the machines could not be operated successfully. The 
interest commanding power of money is therefore not a con- 
sequence of the revenue yielding power of capital goods, and 
the subject of money interest must be considered apart from 
that of capital interest (138), even though the one is closely 
related to the other. We shall therefore first confine our 
attention to the theories that seek to explain why interest 
accrues to capital goods employed in the processes of pro- 
duction, and leave the relation of money to interest for subse- 
quent consideration (130). We cannot, however, completely 
eliminate reference to money interest when reviewing these 
theories, for most of these do not recognize the distinction. 
16 



242 DISTRIBUTION OF WEALTH [i89. 190 

189. Current Theories of Interest. — The power of money 
to command interest, as well as the disputes regarding the 
propriety of taking interest, date back to ancient history. It 
is, however, only in recent times that attempts have been 
made to explain why it is that money and capital goods pos- 
sess this power. In the first attempts of this kind, among 
which those of Calvin and Turgot are to be counted, the 
power of one form of capital was attributed to the like power 
of another form. These explanations accordingly fail to go 
back to the original cause. Subsequently various theories 
have been advanced in the endeavor to explain the funda- 
mental cause of interest. These theories may be divided into 
two categories : first, those which assume interest to be due to 
natural and inevitable conditions, and second, those which 
assume it to arise from conditions which are purely conven- 
tional and unnatural. The first of these can be subdivided 
into two classes, one of which comprises those theories that 
attribute interest to a service rendered by the thing, namely 
capital, while the other includes those conceptions of the sub- 
ject which consider the service as being rendered by the owner 
of the thing, namely, the capitalist. 

We have thus altogether to deal with three distinct ideas, 
namely: (1) the productivity theories; (2) the abstinence 
theory and its variant, the ' ' Positive Theory of Capital, ' ' and 
(3) the exploitation or socialistic theory. 

A very comprehensive review and critical analysis of the 
earlier theories of the subject of interest is that published by 
Eugen V, Bohm-Bawerk in 1884.^° In this work the defects 
of the various theories treated are exhaustively discussed, and 
we need therefore but briefly touch upon these earlier theories. 
Bohm-Bawerk 's own theory of interest, the "Positive Theory 
of Capital, ' ' however, calls for a more extended consideration. 

190. Calvin's and Turgot's Explanation of Interest. — It 

was during the time of the Reformation, when so many con- 
ceptions of ethics were revolutionized, that the reformer John 

™ See list of authors quoted. 



190] CAPITAL GOODS AND RETURNS 243 

Calvin, opposing the orthodox doctrine that usury should be 
forbidden, defended the interest of money on the ground that 
such interest is paid because with the borrowed money may be 
bought a house or a field from which profits can be derived 
(204, 237). Thus he sought to explain the interest command- 
ing power of money by citing the rent yielding power of a 
house or a piece of ground. This reasoning has since been 
accepted as conclusive without ever being subjected to a 
critical scrutiny. 

Later, in the eighteenth century, Turgot, a prominent ex- 
ponent of the physiocratic school of political economy, adopted 
practically the same line of reasoning in an effort to explain 
the interest commanding power of capital. He observed that 
capital may be invested either in land or in industrial or com- 
mercial pursuits. When invested in land it returns rent; 
hence nobody would make industrial or commercial invest- 
ments if these would not also bring profitable returns (205). 
He thus sought to trace the capability of capital goods to 
yield an income to the like capability of land to return rent. 

But this method of reasoning does not clear up the cause 
of interest. Two things will be exchanged only if both pos- 
sess certain qualities which the parties to the exchange regard 
as equivalent. These qualities must be possessed by the 
things before the parties will even consider an exchange. The 
exchange may therefore be accepted as evidence that the two 
things have equivalent qualities, but does not explain why it is 
that these qualities are possessed by the objects of the ex- 
change. The money on the one hand and the house or field of 
Calvin on the other were exchangeable for the reason that each 
possessed the power of bringing a revenue (181), but the 
power of money to bring a revenue is not a result of the fact 
that money is exchangeable for land. The exchangeability is 
only a manifestation of the fact that both money and land 
have this power, but does not explain the why and wherefore. 
The same objection holds good against Turgot 's argument, 
inasmuch as the interchangeability of land and capital goods 
as investments is accepted as a premise. 



244 DISTRIBUTION OF WEALTH [loi 

191. The Productivity Theory of Interest. — The most 
prevalent way of accounting for capital returns is to accredit 
capital goods with the faculty of assisting labor. It is held 
that capital, by assisting labor, earns interest for its owner. 

This theory receives wide acceptance because, at first 
sight, it appears to agree with facts and seems very plaus- 
ible. Yet, on closer examination, it proves unsatisfactory. 
Many facts are distinctly out of harmony with this proposi- 
tion. Capital goods which return profits consist not only of 
means of production, but also of the goods which are being 
forwarded to maturity (186). A productive faculty might 
apparently be imputed to means of production, like looms or 
other tools, but certainly not to the goods in process of pro- 
duction, like yams that are being woven into cloth. It cannot 
be said of yarns that they assist the workman to weave cloth, 
nor can it be said that by the use of yarns the making of cloth 
is facilitated, so that he who furnishes the yams should 
obtain more than their value by reason of the assistance which 
the yarns render in the making of the cloth. Yet we know 
from experience that profits accrue alike to means of pro- 
duction and to the goods in course of production. An ex- 
planation of capital returns, to be really valid, must be ap- 
plicable to all forms of capital goods that actually return 
profits in the nature of interest. 

We have already seen (132) that capital goods are im- 
mature products, the embodiment of past labor, to be utilized 
through future labor in the production of mature goods, and 
that the efficiency of modem methods of production is due to 
the use of preceding inventions and discoveries. The in- 
creased productivity of labor, when more efficient and in- 
cidentally more complex methods of production are employed, 
is usually accredited to the greater amount of capital employed. 
But it is by no means clear why this credit should not be 
given to progressive invention and improvements in methods 
of production. The claim that capital is producing this effi- 
ciency, or at least helping to produce it, requires to be 
examined. 



192] CAPITAL GOODS AND RETURNS 245 

192. Analysis of the Productivity Theory. — ^Let us assume 
that by a newly invented machine the cost of manufacturing 
stockings is materially reduced. While the inventor holds a 
patent, he is able, by making such machines and renting them 
out, to obtain an income proportionate to the benefit his in- 
vention bestows. But this is changed when the patent expires, 
and the right to make and sell similar machines becomes public 
property. The manufacturers then buy machines instead of 
renting them, and at first they make a handsome profit, since 
they need no longer pay royalty for the use of the machines. 
However, the lucrative trade of making stockings attracts other 
manufacturers, and the increased output of these goods lowers 
the price, so that the consumers reap more and more of the 
benefit of the invention. This process takes place gradually. 
The profits obtained through the use of the machines gradually 
shrink as more machines are brought into use, and the price 
of their output is reduced. The question now arises, at what 
point will this process come to an end ? 

It is obvious that more capital will be invested in such 
machines so long as the profits that can be derived from their 
use exceeds the profits which capital invested otherwise usually 
brings; hence the increase of those machines will cease when 
profits on capital invested in them fall to the current rate of 
capital returns. 

Thus, if capital otherwise invested did not have the power 
to yield an income, the number of these machines would be 
increased until the income on their use is reduced to the level 
of what other capital yields, namely to nil. We must there- 
fore conclude that capital invested in these machines con- 
tinues to return interest, not because the machines reduce the 
cost of production, but because other investments afford capital 
interest. The productivity theory of interest simply assumes 
the very thing which it undertakes to explain, namely that in- 
vested capital affords a profit in the form of interest. The 
question as to why capital brings an income is not answered 
(243a). 

According to our former study (149) one of the effects of 
competition is that of conferring upon the consumers all 



246 DISTRIBUTION OF WEALTH [192 

benefits arising from improvements in methods of production. 
But according to the productivity theory of interest this is 
only partly true, for it is claimed that a portion of this benefit 
rightfully belongs and naturally goes to capital (2436). If 
the productivity theory were correct, it should be possible to 
point out the economic force which defeats the fundamental 
law of competition. 

The endeavor of the French economist Bastiat to explain 
why it is that interest accrues to capital has the same short- 
coming. This writer illustrates his argument by the case of 
James who has made a plane which he loans to William for a 
year, to be used in planing planks. At the end of the year the 
plane is worn out, and William makes a new one which he 
hands over to James in return for his loan, and with it he 
gives him a plank to pay for the advantage which the plane 
afforded. 

Whatever it may have been that induced William to agree 
to pay a plank as interest, an isolated case cannot establish the 
rule on which the power of capital is based. William would 
certainly not agree to borrow the plane of James on condition 
of paying a plank, if John, another carpenter — who had needed 
for his own work a plane that would last him a year, but had 
made two, because he could make these in less than double the 
time required to make one — were to offer the loan of his second 
plane to William on condition of getting back a new and 
equally good one at the end of a year and only half a plank 
for the use of the one loaned. Suppose, furthermore, that 
there were yet others besides John who had made more planes 
than they had immediate use for. It is then quite conceivable 
that in view of saving the trouble of their storing and the risk 
of their shrinking or cracking or of their being stolen, com- 
petition will bring down the recompense for lending planes to 
the point of merely a return of a new plane in the place of the 
one loaned. The examination of the case must evidently be 
extended to the general market by assuming that the lending 
of planes is a business which some of the plane makers carry 
on in addition to making and selling planes. 

So long as capital invested in the lending of planes brings 



193] CAPITAL GOODS AND RETURNS 247 

an income exceeding the return of capital invested otherwise, 
the number of plane lenders increases, and through compe- 
tition the hire of planes comes down. On the other hand, 
when these profits are below the current rate of returns from 
other forms of capital, the plane makers prefer to sell the 
planes and to invest the money received in some other way, 
until the hire of planes rises again by reason of the lessening 
competition among plane lenders. In the end the profits from 
lending planes adjust themselves to the current rate of profits 
commanded by capital generally. 

It is thus apparent that Bastiat's illustration can account 
for the willingness of William to pay a plank for the loan of 
the plane only by assuming that capital generally has the 
power to command interest, and since it is wrong to assume 
that which is to be proven, it follows that Bastiat 's illustration 
fails to explain interest. 

193. Interest Ascribed to Nature's Reproductive Powers. 
— The reproductive powers of live stock have furnished a 
favorite argument in accounting for interest. Thus Jeremy 
Bentham, in criticising Aristotle, who condemns interest on 
the ground that ''all money is in its nature barren," argues 
that: 

A consideration that did not happen to present itself to that great 
philosopher, but which, had it happened to present itself, might not 
have been altogether unworthy of his notice, is, that though a dario 
would not beget another daric, any more than it would a ram, or an 
ewe, yet for a darie which a man borrowed he might get a ram and a 
couple of ewes, and that the ewes, were the ram left with them a cer- 
tain time, would probably not be barren. That then at the end of the 
year, he would find himself master of his three sheep, together with t^^o, 
if not three, lambs; and that, if he sold his sheep again to pay back 
his daric, and gave one of his lambs for the use of it in the mean time, 
he would be two lambs, or at least one lamb, richer than if he had made 
no such bargain.^^ 

Bentham 's illustration concedes on the one hand that money 
is barren and implies, on the other, that the income accruing 
from the vital power of the sheep is in the nature of interest. 

"Bentham, letter x, p. 101. 



248 DISTRIBUTION OF WEALTH [i94 

Yet we are told that the owner of sheep sells them for a daric. 
This assumption is not consistent with the premises, for no 
one who has a goose that lays golden eggs will give it in ex- 
change for a common goose. From the premises it would 
follow that the seller of the sheep, at the end of the year, would 
be two lambs, or at least one lamb, poorer than he would have 
been, had he not made that bargain. It cannot be assumed 
that the seller of the sheep was a fool. There must be some 
flaw in Bentham's argument, for the sellers of sheep are, as 
a rule, as shreAvd as the buyers. The fault is obviously in one 
of the premises. The housing, feeding and raising of the sheep 
and lambs require labor which the seller of the sheep desires 
to avoid, and without the performance of which the buyer of 
the sheep could not become the owner of the lambs; and 
under free competition the value of the accrued lambs would 
adjust itself to correspond with the value of this labor. The 
value of the lambs would therefore represent wages and not 
interest, and Bentham's logic falls to the ground.^^ 

194. Interest Theory of Henry George. — No more con- 
clusive than the foregoing is the theory of Henry George, 
according to whom : 

Interest springs from the power of increase which the reproductive 
forces of nature, and the in effect analogous capacity for exchange, 
give to capital.^ 

In this statement the author refers to forces of nature which 
are accessible to all who choose to avail themselves of their 
benefit, for in another passage he speaks of them as being 
available at the margin of cultivation. If they were in some 
way limited and available only on intra-marginal land, the 
income they render would come under the head of rent, not of 
interest. On the other hand, those forces of nature which are 
available without hindrance cannot be monopolized and can- 
not, therefore, have any value, and having no value, the value 
of that which is produced by their aid cannot exceed the value 
of the efforts necessary to utilize the forces. This value is 
wages, not rent nor interest. It is manifest, on examination, 

«== Cf. Bilgram, pp. 83 ff. '' George, p. 138. 



195] CAPITAL GOODS AND RETURNS 249 

that the theory of interest advanced by Henry George is based 
upon a confusion of the premises. 

195. Inception of the " Abstinence " Theory of Interest. 

— The abstinence theory has really been evolved from the 
doctrine that interest depends upon the supply and demand of 
capital goods. According to Ricardo : 

The rate of interest is not regulated by the abundance or scarcity 
of money, but by the abundance or scarcity of that part of capital not 
consisting of money." 

This statement implies that labor employed in conjunction 
with capital is below its maximum efficiency because the 
available amount of capital is limited (162, 214, 242, 316). 
An increase of capital would, accordingly, enhance labor's 
productivity and at the same time reduce the interest rate. 
This phase of the subject has been fully discussed before 
(157-161) and graphically illustrated in Figs. 14-19. Let us 
analyze Ricardo 's idea more fully. 

If OC" of Fig. 18 represents the available amount of 
capital, then C"e" represents its final efficiency, 01 the rate of 
interest, the area OC"e"E the corresponding output of the 
labor employed, and the area OC"e"I that portion of the out- 
put which goes to the capital OC" as interest. Let us sup- 
pose that the ordinate 01 represents a rate of interest — pure 
interest — of 4 per cent. If now the capital were increased by 
C"C, the output of the same labor would be increased by the 
area C'C'e'e", and the rate of interest would be reduced to Oi, 
say, 2 per cent. But according to Ricardo 's assumption this 
additional output is not sufficient to induce the production and 
employment of the additional capital C"G', for it is plain that 
if an additional supply of capital were forthcoming, the rate 
of 4 per cent, could not be maintained, and interest would fall. 
The question thus arises, why is it that the production and 
employment of capital does not go beyond the point where 
capital brings the current rate of interest? This line of in- 
quiry points to the existence of some impediment to the pro- 

" Ricardo, p. 284. 



250 DISTRIBUTION OF WEALTH [196 

duction of capital, and this impediment is currently considered 
to be of a psychological nature. 

196. Senior's Abstinence Theory. — The above idea made 
its appearance among the earlier writers who held that men 
would have no inducement to produce and invest capital if 
there were no adequate reward for their doing so. It would 
thus follow that interest is necessary as an incentive to in- 
dustrial progress. Senior was the first to formulate this 
view into a definite theory. He attributed to man an inborn 
reluctance to save, a trait analogous to the reluctance to work. 
Just as the disinclination to perform work is overcome by the 
prospective value of the product, so is the reluctance to save 
overcome by the anticipated interest accruing for deferring the 
enjoyment of past productions to a later time. The service for 
which interest is the natural recompense is "abstinence," ^° 
just as labor is the service for which wages are paid (242). 
This reluctance to save is supposed to fully account for that 
scarcity of capital through which interest can be explained. 

This theory was by many considered conclusive, but its 
weakness has been recognized by a gradually increasing 
number of students. The assumption that wealth will not be 
produced and saved for further use in production, unless the 
"abstinence" involved in such use of wealth obtains com- 
pensation in some form, is whoUy inconsistent with the fact 
that there are times when the market supply of products of 
all kinds is so much greater than the demand that this con- 
dition is generally regarded as due to "overproduction." 
Moreover, there are other inducements besides interest for 
saving and investing capital which can account for all the 
capital now extant (318). A re-statement of the abstinence 
theory appeared to be necessary to save it from being totally 
discredited by the accumulating objections, and this was pre- 

® It is obvious that abstinence, in this sense, is a misnomer, since 
the saver of wealth who permits it to be used by a productive group 
does not really abstain, that is, relinquish the enjoyment of his accumu- 
lated wealth; he merely defers its use for gratifying his own desires. 
For this reason the term " waiting " has been used instead by many 
modern writers. 



197] CAPITAL GOODS AND RETURNS 251 

sented by Bohm-Bawerk in his ''Positive Theory of Capital." ®® 
In this theory the negative concept "abstinence" is replaced, 
as a fundamental premise, by the positive idea "evaluation," 
and particularly, the difference of evaluation of present as 
compared with future benefit. 

As this is by far the best presentation, the abstinence 
theory must stand or fall with it. We shall therefore subject 
only this latest statement of the theory to a critical examina- 
tion, preceded by a brief summary of the same.®^ 

197. Bbhm-Bawerk's Theory of Interest. — The "Positive 
Theory" is based on the postulate that: 

Present goods are, as a rule, worth more than future goods of like 
kind and number.^^ 

In this postulate the term ** present goods" means goods 
ready for immediate consumption, and also money in hand. 
Among "future goods" are included not only goods and 
money receivable in the future, but also goods in hand which 
are not yet adapted for consumption, namely capital goods. 

The difference in the evaluation or rating of present as 
against future goods is regarded as being the combined effect 
of a series of causes which, though of different nature, exert 
their influence in the same direction. Three principal causes 
are enumerated. The first consists of the difference of the 
relation of demand and supply at different periods.®^ This 
may be exemplified in the case of a farmer who has lost his 
crop and needs immediate relief, or in the case of, say, a 
young physician who is in need of means for his establishment 
and looks forward with confidence to his more prosperous 
future. In such cases it is less hardship to return a greater 
value in the future than to suffer for the want of a lesser 

*" See list of authors quoted. 

" The argument here adduced is the same as that presented under 
the title : " Analysis of the Nature of Capital and Interest," by H. 
Bilgram, Journal of Political Economy, March, 1908. 

^ Bohm-Bawerk, II, p. 237 ( 248 ) . Numbers in parentheses refer to 
the German edition. 

^'i&iU, pp. 249 (262) -jf. 



252 DISTRIBUTION OF WEALTH [197 

value at present. The second cause adduced is of a purely 
psychological nature, namely the propensity of man to under- 
rate future pleasure and pain simply because they are remote 
(242) J° The postulate put forth as the third cause '^^ is really 
an elaboration of the first and second causes in their relation 
to the proposition that 

the roundabout ways of capital are fruitful but long," 

in the sense that the time intervening between an effort of 
production and the realization of the utilities resulting from 
the effort increases with the adoption of more complex though 
at the same time more efficient processes of production. Thus, 
if an employer has at his disposal, say, one month's labor, in 
other words, so much capital, he may proceed to employ it 
with greater or less efficiency, according as he selects a more 
or less complex system of production. If he wants "present 
goods" quickly, he obtains less goods from the same amount 
of capital by the use of simple methods of production than if 
he chooses a more efficient method that yields the finished 
products after a longer interval. The amount of goods obtain- 
able from a given quantity of capital with a more complex 
and protracted method of production is therefore in the end 
greater than with a simpler and quicker one. 

It is pointed out, however, that the greater quantity of 
goods obtainable by a more complex method, but only after a 
greater interval of time, has not a correspondingly greater 
present value, because future goods are underrated in com- 
parison with present goods. As the lapse of time involved 
in the use of more complex methods of production becomes 
greater, there is a point of diminishing returns beyond which 
the gain due to the increase of the products is overbalanced 
by the underrating of the value on account of the greater 
lapse of time required for the production. 

In comparing different methods of gradually increasing 
complexity and corresponding delay, it will be seen that the 
present value of the future products into which a given amount 

'» Bohm-Bawerk, II, pp. 253 (266) ff. "^Ihid., pp. 260 (273) ff. 

"76td., p. 82 (87). 



197] CAPITAL GOODS AND RETURNS 253 

of capital goods is finally converted reaches a maximum at the 
point of diminishing returns. This highest present evalua- 
tion of the future products determines the value of the 
capital goods. According to this theory the present value of 
capital goods equals the discounted or underrated value of the 
final product obtainable from the capital (198), always assum- 
ing, of course, that this latter is being employed in the most 
advantageous way. 

Upon these propositions Bohm-Bawerk bases his theory 
of interest. His conclusions are summarized under three heads, 
the first relating to the subject of loans and interest on loans ; 
the second to employed capital goods and the returns there- 
from ; and the third to interest derived from enduring goods, 
such as means of production in general, the treatment under 
this head being little more than an elaboration of the discourse 
under the second heading. 

A loan is viewed as an exchange of present for future goods."^^ 
The lender gives a present sum of money in exchange for a 
future sum. But money receivable at a future time being 
underrated as compared with the same amount in the present, 
it follows that a future sum of money, in order that it shall 
have a value equal to the present sum, must be greater in 
amount. In giving a greater amount of future money in ex- 
change for a lesser amount of present money, the borrower 
gives equivalent for equivalent ; and when the future becomes 
present and the debt becomes due, the debtor pays the greater 
amount in cancelling the debt. Where the loan is absolutely 
secure and all charges for risk and supervision are eliminated, 
the excess of the amount ultimately returned by the borrower 
over the amount originally advanced by the lender is "in- 
terest. ' ' 

The potential utility of capital goods, like that of machinery 
that wears out, or like that of material that is used up in course 
of production and incorporated in the goods produced, is to 
be regarded as having entered, through a process of economic 
metamorphosis, into the final products and as composing the 

^* Bohm-Bawerk, 11, pp. 285 (299) ff. 



254 DISTRIBUTION OF WEALTH [197 

utility of the consmnption goods (10) . The consumption goods 
must accordingly be considered as an aggregation of the 
several different kinds of capital which, in their matured and 
assimilated form, have entered into the aggregation. The 
value of the aggregation is due to its final utility, and the 
value of each of its components is a part of the aggregate value. 

According to the undervaluation theory the value of any 
capital good depends upon the value of its respective part of 
the final product, and this being a future value, its under- 
valued or discounted amount is the present value of the capital 
good. 

While capital is being forwarded and converted from its 
present form into its final condition as part of the final 
product, its present value — the discounted future value — 
grows to full rate, and the increase constitutes the interest 
that accrues to capital.'^* It goes without saying that this 
increase in the value occurs only while the capital is being 
advanced toward its final stage, that is, while being utilized in 
production. While capital lies idle, while its latent utilities 
remain in statu quo, interest cannot arise.'^^ 

This is in substance the reasoning through which Bohm- 
Bawerk explains interest, but it is clear that his theory 
does not differ essentially from Senior's Abstinence Theory. 
Senior proceeds on the proposition that the owner of goods 
available at present is averse to defer their consumption — to 
' ' abstain " or " wait ' ' — and when he does so for the benefit of 
others, he is entitled to compensation for so doing. Bohm- 
Bawerk proceeds on the proposition that goods available in 
the future are evaluated lower than the same amount of 
goods available now. Since it is obvious that the giving of 
one thing of value for another thing of less value involves a 
sacrifice and is contrary to human nature, it follows that both 
these propositions are merely different ways of expressing the 
same fundamental thought. Hence the "Positive Theory" 
cannot be valid if the ' ' Abstinence Theory ' ' is untenable, and 
that the positive as well as the negative form of the proposition 
is open to question will appear from the following. 

"C/. Bohm-Bawerk, II, pp. 302 (318) ff. '^ Cf. ibid., p. 303 (319). 



198] CAPITAL GOODS AND RETURNS ^55 

198. Utility Theory of the Value of Capital Goods. — As 

we have just seen, the faculty of employed capital goods to 
return interest is explained on the basis of two assumptions : 
(1) that future goods are evaluated at less than present goods 
of like kind and number, and (2) that the value of capital 
goods depends on the value of the final consumption goods 
into which they become converted through productive processes. 

Consumable goods are produced through a number of con- 
secutive and collateral processes, in each of which a certain 
amount of capital is contributed to their existence. The goods 
are accordingly the aggregation of all these several amounts 
of capital in assimilated form. 

The number of operations necessary to produce consump- 
tion goods is, as a rule, indefinite, but in order to present a 
concrete illustration, let us assume that the making of coats, 
for example, requires but four, namely those performed (1) 
by the machinist, making looms, (2) by the spinner in making 
yarns, (3) by the weaver, turning yarns into cloth, and (4) 
by the tailor, making the cloth into coats and selling them. 
The product of each operation is regarded as so much capital. 
We may suppose, for the sake of argument, that, out of 100 
coats, 4 are to be credited to the capital ''loom," 30 to the 
capital "yarns," 26 to the capital "weaver's effort," and 40 
to the capital "tailor's effort." 

Taking these proportions as a basis, the share of the final 
product to be credited to a loom on which the cloth for 20,000 
coats, each worth $10, can be woven, amounts to 4 per cent, of 
the total number, namely 800 coats, and the value of this share 
is $8000. 

But since the life of a loom is, say, 12 years, and the con- 
version of the loom into cloth, and ultimately into coats, takes 
place gradually, the purchaser of a loom can realize its proper 
share only in instalments during a gradually increasing 
period, the average of which is 6 years. According to the 
utility theory, the value of the loom to the weaver becomes 
determined as follows. The value of the final products into 
which the loom can be converted is $8000. But as this value 
can be realized only in the future, after an average period of 
6 years, the sum of $8000, 6 years hence, is estimated by the 



256 DISTRIBUTION OF WEALTH [198 

weaver at a present value of only about $6000. Hence the 
value of the loom, and accordingly the machinist's share for 
making it, would be $6000.^« 

But now comes the question which the utility theory leaves 
unanswered. How is the user of capital goods, through whose 
efforts they are forwarded toward their final condition, to 
know what fraction of the total value of the consumption 
goods that will ultimately be obtained is really to be credited 
to the one and to the other of the several different kinds of 
capital that are being used up in making the product? In 
other words, what share of the total number of coats is due 
to the loom, what share to the yarns, and to the capital pro- 
duced by the weaver's effort, and to that produced by the 
tailor's? The weaver, when he comes to buy a loom, knows 
from experience that a loom is good for 12 years' use and that 
in using it up the cloth woven on it will be enough to make 
20,000 coats, each worth $10 when finished. But how is he to 
know that the part which the loom is supposed to contribute 
to the ultimate product is so and so much? The determina- 
tion of the value of the various items of capital making up the 
final product being the question at issue, it cannot be assumed 
that the value of any one of these items is already knovvTi. 
While the share of the coats which is due to the loom has here 
been assumed as being 4 per cent., there is nothing to show how 
it comes to be that percentage or any other, and the value of 
the product into which the loom is finally converted being un- 
known, it cannot be the starting point in the determination of 
the value of the loom itself (197). It follows that the utility 
theory of value is inapplicable to capital goods, such as the 
loom of our illustration, for if the weaver has no means of 
judging what portion of the final consumption goods is due 
to the use of the loom, he cannot gauge the future utility of 
the loom, nor the value which, when discounted, is alleged to 
be the value of the loom. 

" The figures here used are only for the purpose of illustration. We 
have assumed that only four instead of perhaps a hundred different 
operations go to the making of the coats, hence the sum credited to the 
loom appears abnormally high. 



199] CAPITAL GOODS AND RETURNS 257 

While final utility does indeed determine the value of coats, 
the sharing of this value among the various agents that co- 
operated in their production can be determined only on the 
basis of the amount of effort given by each toward the attain- 
ment of the result. In the determination of the value of 
capital goods effort, or cost, is as much an essential factor as 
is the utility of the final product. 

199. Time Involved in Production with Capital.-^One of 
the essential premises of the Positive Theory of Capital, as 
applied to "enduring" capital goods, is the assumption that 
the indirect or capitalistic methods of production, though more 
efficient than the primitive methods, take more time. Actual 
facts do not bear out this assumption, as may best be shown by 
a concrete example. 

Let us compare the primitive with the modem method of 
producing knit gloves on the following supposition. 

One workman, knitting by hand, can finish one glove per 
hour, or 10 per day (30). The modem method requires a set 
of four machines, each performing a different operation. 
Four workmen can make these machines in 3 years and then, 
by their use, can finish 160 gloves daily. In 20 years of 300 
working days each, or after the completion of 960,000 gloves, 
that is, 480,000 pairs, these machines are worn out. 

The modern method is of a composite nature. The first 
efforts toward the making of the gloves are applied to the 
building of the machines, which latter thereby become the 
embodiment of a certain part of the labor necessary to make 
gloves. These machines represent 960,000 gloves in a partly 
finished state, and subsequent efforts of a different nature are 
required for finishing the product. These subsequent efforts 
are those of operating the machines, whereby the finished goods 
are obtained. The first one of the gloves will be finished 
after the expiration of 3 years, counting from the beginning 
of the work ; the last one 20 years later, namely at the close of 
the twenty-third year. From the beginning of the fourth to 
the close of the twenty-third year the production of finished 
gloves will keep on at a uniform pace, hence the average time 
17 



258 DISTRIBUTION OF WEALTH [199 

elapsing between the very beginning of the work and the pro- 
duction of completed goods is 13 years. 

How does this contrast with the primitive method? The 
same four men, if knitting by hand, will complete 4 gloves in 
the first hour and will then begin another lot of 4. In making 
each glove only one hour will elapse between the beginning 
of the work on it and its completion, and it would appear that 
the reasoning of the "Positive Theory" proceeds on the basis of 
a comparison of this period with the average time of 13 years 
of the preceding case. 

This comparison, however, is based on unequal premises, 
as the time of making 4 gloves cannot reasonably be contrasted 
with the time of making nearly a million. The four machines 
embodied part of the labor applied toward the making of 
960,000 gloves. While the machines were being made, the 
work of producing this quantity of goods was being uniformly 
advanced, and even the first hour's work on the machines was 
as necessary for the production of the last glove as it was for 
that of the first one. To make the comparison reasonable, it 
should be based on the production of equal quantities. The 
period of 13 years is the average interval between the first 
effort and the completion of 960,000, not of 4 gloves. To 
make this larger number by the primitive method, four work- 
men would have to work 80 years, which corresponds with an 
average of 40 years expiring between the beginning of the 
work of making this number and the producing of the finished 
goods. The comparison, then, is obviously in favor of the 
capitalistic method, in the proportion of 13 years to 40. 

At the same time, the fact must be admitted that at the 
beginning there is a period in which the balance is in favor of 
the primitive method. Should two groups, each consisting 
of four workmen, begin work on the same day, one group 
adopting the primitive, the other the capitalistic method, the 
first group would at once come into possession of "present 
goods, ' ' while the second group would not have a single glove 
finished until after 3 years of labor; and in addition to this 
time, one year more would be required by the second group to 
overtake the first. But thereafter the second group would 



199] CAPITAL GOODS AND RETURNS 259 

come into possession of present goods in the form, of finished 
gloves so rapidly that the first group would be left far behind. 
Even if a second period of 3 years were spent in the making 
of another set of machines after the first set is worn out, the 
second group, 26 years after the beginning of the operation, 
would still have, in addition to the new machines, an excess of 
648,000 gloves over the production of the group that had 
adopted the method that brings first results quicker. Both 
this excess and the new machines are a clear gain, in quantity 
as well as in time, resulting from the adoption of the capital- 
istic method of production. After the expiration of that 
initial period of 4 years the second group will never again 
fall behind the first, but will forever remain far ahead in the 
possession of "present goods" which will be forthcoming 
more rapidly, by an equal expenditure of labor, than the 
first group can ever hope for. As regards the production of 
"present goods," the first group has an advantage over the 
second only for a few years after the first introduction of the 
improved method. It is obvious that the method which affords 
such an excess of products, the method by which the total 
time for completing an equal quantity of goods is reduced 
from 80 to 23 years, cannot in any sense be considered the 
more time-consuming one. Instead of involving sacrifice of 
any sort, the capitalistic method is a source of gain in time as 
well as in every other respect after once the initial period has: 
been passed. Only for this period is it true that capitalistic 
methods of production involve a sacrifice in time. 

It is to be observed that this period of 4 years falls within 
the time when the more productive method displaces the less 
productive. It is not repeated each time a new set of machines 
is made, for the excess of production attained through the use 
of the preceding set of machines far more than covers the 
loss of time required for making a new set. The period dur- 
ing which the first group has an advantage over the second 
is not a concomitant of regular capitalistic production, but 
attends only the process of displacing antiquated by improved 
processes of work. 

Were a comparison made between two capitalistic methods, 



260 DISTRIBUTION OF WEALTH [199 

of which one is more productive than the other but requires 
the use of a greater amount of capital, the former, after the 
brief period of waiting incident to the introduction of the 
more productive method, would be found to be the quicker. 
It can therefore be definitely asserted that — ^barring a brief 
period attending the change from a less to a more efficient 
method — the most productive method is by all rules of logic 
also the quickest. Modern methods, instead of delaying pro- 
duction, actually hasten the same. After the period of transi- 
tion is past, they invariably bring "present goods" more 
rapidly into the possession of the producers than do the more 
primitive methods. 

This conclusion can be further confirmed. Suppose a 
community which follows the primitive method above de- 
scribed has on hand a supply of gloves meeting the demand 
for one year. Under these conditions it is immaterial, whether 
each glove maker continues production by fully completing 
one piece after another, or by simultaneously advancing his 
year's product of 3000 gloves, forwarding the work on all 
from stage to stage, so that he will have at any time the com- 
plete number of partly finished instead of a smaller number 
of finished gloves on hand. If then one of the glove makers, 
imbued with the idea that present goods are more valuable 
than future goods, were to complete piece after piece, he 
would be unable to score any gain over those who select the 
method of simultaneous production, as in both cases it takes 
3000 hours to make as many gloves, and on account of the 
stock on hand the demand for the new gloves does not realize 
before the close of the year. But when the mode of simul- 
taneous production is improved through the introduction of 
the roundabout or capitalistic method, the time of producing 
the goods is invariably reduced, and it is therefore unreason- 
able to ascribe to the use of capital the supposed disadvantage 
of the postponement of the completion of ''present goods," 
which is really due to the use of the simultaneous method of 
production. It is the simultaneous and not the capitalistic 
feature which gives the method the appearance of being 



200] CAPITAL GOODS AND RETURNS 261 

"long." When the facts are correctly analyzed, they show 
that the use of capital invariably hastens production. 

This is in direct conflict with the proposition which forms 
part of the groundwork of the ' ' Positive Theory. " ^'^ It is 
true, a group employing primitive methods can realize an 
income on the sale of their goods from the start, which a 
group introducing a capitalistic method cannot do. But this 
latter group gains a greater recompense for their efforts after 
a short initial period. This greater recompense is however 
wages for more efficient service and is not to be confounded 
with capital interest. The "Positive Theory" clearly fails to 
explain the power of capital goods to return "interest." 

200. The Value of Lending. — Nor can this theory be ap- 
plied with any better success to the ■ explanation of pure in- 
terest on money loans. The discussion of money interest 
should properly be deferred to the following chapter, but 
in order to avoid a break in the argument it is advisable to 
include in the present discussion also that part of the Positive 
Theory which relates to money interest. We shall therefore 
next deal with the proposition that a loan is an exchange of 
present for future goods and that interest accrues to the 
lender because present goods are prized higher than future 
goods. 

It cannot be denied that it is in human nature to under- 
rate future pleasure and pain. There are not a few who 
prefer present goods to those of the future and who evince 
their dislike for present effort by putting off work to the last 
moment. 

But it is equally true that there are others who prudently 
provide for the exigencies of the future. They recognize 
certain definite advantages which future goods have for them 
over present goods, and therefore value those future goods 

" " The disadvantage connected with the capitalist method of pro- 
duction is its sacrifice of time. The roundabout ways of capital are 
fruitful but long; they procure us more or better consumption goods, 
but only at a later period of time. This proposition, no less than the 
former, is one of the ground pillars of the theory of capital." — Bohm- 
Bawerk, II, p. 82 (87). 



262 DISTRIBUTION OF WEALTH [200 

higher than the present. In other words, they save present 
goods for future use. Of their own accord they deprive them- 
selves of some present pleasures in order to provide against 
possible want at some future time. The question therefore 
arises, which of the two influences is the greater economic 
force ? 

The "Positive Theory" is founded on the assumption that 
the under-estimation of future pleasure and pain as compared 
with the present is the dominant propensity, in other words, 
that the preference of immediate over deferred consumption 
and the disposition to put off exertion to the last moment pre- 
dominate. A future and consequently under-estimated sum, 
to be equal in value to a present sum, must be greater. Hence 
he who gives a certain present sum in exchange for a larger 
future sum, the present value of which is equal to that given, 
and waits for the larger future sum to become present, gains 
the excess, which is interest. It is therefore altogether appro- 
priate to designate the service given by the lender as "wait- 
ing," meaning by this term a putting off of the enjoyment of 
goods in hand for the benefit of others. The lender sells 
"waiting" and the borrower buys it. "Waiting" thus be- 
comes a service having a market value. The price which the 
borrower pays for the service rendered him by the lender's 
waiting is interest. The interest question is thus reduced to 
the question : What is the value of this service ? 

The service rendered by the lender through "waiting" 
may at times have a utility of the highest degree. Circum- 
stances may arise under which it will save life, as in the 
case of a farmer whose crop has been destroyed by hail and 
who must starve if others are not willing to lend him the 
means of subsistence, an equivalent of which he could without 
difficulty return to the lender from next year's crop. From 
this utility of highest importance the possible utilities or 
advantages that may be derived from the lender's "waiting" 
range down through all grades of importance to the vanish- 
ing point. Therefore the value of the service of lending comes 
within the range of the law of value, and according to the 
utility theory of value it depends upon final utility. 



200] CAPITAL GOODS AND RETURNS 263 

In his elaboration of the law of value Bohm-Bawerk has 
clearly shown the process by which the final utility of a com- 
modity, and with it its market value, is determined; and his 
reasoning must, of course, be applicable not only to goods, but 
to all forms of service as well. Accordingly, the final utility, 
and with it the value, of ''waiting" is measured by the im- 
portance of that concrete want which is least urgent among 
the wants that are met from the available supply of 
** waiting. "'^^ 

It is here where the theory clashes with facts, especially 
during periods of business depression, when producers, almost 
without exception, are encumbered by an accumulation of 
products for which they are unable to find a market. The 
supply of produced things, and the supply of labor especially, 
vastly exceeds the effective demand. The wheels of industry 
come to a partial standstill, not, however, by reason of the 
propensity of men to postpone productive effort, for both 
manufacturers and workmen are anxiously scanning the 
market for every opportunity to resume work that has been 
interrupted by an apparently occult force. If the status 
were reversed, if the supply of labor and its products were 
below the effective demand therefor, the hypothesis might be 
entertained that an underrating of the future and a conse- 
quent desire to shirk work is the prevailing condition. But 
the facts are otherwise. Everywhere production has run 
ahead of consumption. Producers are forced to make the 
sacrifice of "waiting" without any hope of recompense for 
it. On all sides the supposed benefits of ''waiting" irretriev- 
ably go to waste. The supply of the service "waiting" far 
exceeds the demand, for otherwise it would not be wasted. 
The "least urgent want met from the available stock," that 
is, the final utility, of "waiting" is at the vanishing point; 
hence, according to the accepted theory of value, the value of 
this service, like the value of air and of water, is nil (242). 

Under our existing economic conditions, in which pro- 
ducers are constantly looking for markets for their surplus 

"C/. Bohm-Bawerk, II, p. 148 (157). 



264 DISTRIBUTION OF WEALTH [200 

productions, the conclusion which we have reached, namely 
that the value of ** waiting" is nil, is indisputable. 

But conditions can be imagined under which the final 
utility, and with it the market price, of "waiting" would 
have a positive value, and under which the reasons advanced 
in support of the "Positive Theory" would be operative, so 
that the value of "waiting" would naturally and properly 
accrue to the "waiter," the lender. 

Let us suppose that a number of men, shipwrecked on an 
island, have gathered stores of food for the winter, and that 
some have succeeded in accumulating more than others. Sup- 
pose, further, that the stores of the less fortunate are insuffi- 
cient to maintain them until the crop of the next season be- 
comes available, while others have some food to spare, but not 
enough to supply the demand of those who need more, with- 
out stinting themselves to some degree. Since food, in this 
case, is the only form of wealth, buying and selling is out of 
the question, and those who need more food can obtain it only 
by borrowing. There will, accordingly, be a market demand 
for the borrowing of food, and only a reluctant supply for 
lending. The intending borrowers not only offer to return an 
equivalent of the borrowed amount, but are willing to pay a 
premium in addition, while the lenders can be induced to 
forego the satisfaction of full meals during the winter only 
through the offer of a recompense. There is an upper limit 
to the premium the borrowers are willing to promise, as well 
as a lower limit to the premium lenders require for their 
"waiting" and consequent loss of comfort, and these limits 
can be represented by curves like DD' and SS' of Fig. 6. The 
market rate of the premium is then manifestly determined at 
the point of intersection of the two curves. In the concourse 
of the market, so to speak, the recompense for lending adapts 
itself to the point where the desire to borrow and the re- 
luctance to lend come to equality. 

It is to be observed that this limit can have a positive value 
only if the supply of food actually gathered is not sufficient to 
fully satisfy all during the time before the next season, for if 
any of the stores were to remain unconsumed by the time the 



201] CAPITAL GOODS AND RETURNS 265 

next crop is gathered, the final utility of "waiting" would 
be nil.^» 

The above reasoning may be applied to the lending of 
other commodities, and of money as well. Unless the marginal 
lenders, the lenders who supply the least urgent want, are 
obliged to deprive themselves of some definite comfort by 
"waiting," there can be no final pain of abstinence, nor can 
the preference for future over present goods make itself 
manifest as a factor in competition. In the presence of any 
such condition as that known as "overproduction," the final 
utility of "waiting" cannot have a positive value. 

201. Relation of Money to Merchandise. — Notwithstand- 
ing that "waiting" has no positive value, manufacturers and 
merchants, men who have produced goods in advance of the 
demand therefor, and who must therefore hold these present 
goods until some future time without any hope of recompense 
for the "waiting," are the very ones who flock to the banks 
and the money lenders, seeking to obtain present money in 
exchange for future money, seeking to buy the service of 
"waiting," while they themselves are forced to let their own 
' ' waiting " go to waste. In the light of the ' ' Positive Theory ' ' 
they are purchasing the service of advance production, that ia 
to say, the service of the exchange of present goods for future 
goods, paying a high and often ruinous price for the service, 
while they themselves have a surplus of present goods and 
are "waiting," not only without recompense, but at further 
cost of keeping the present goods for the future. It is simply 
inconceivable that producers have so little understanding of 
their own interest as to pay others for "waiting," while they 
let their own "waiting" go to waste. 

When the reason which manufacturers and merchants 
have for borrowing money is more carefully examined, it will 
be seen that what they seek is not the service of "waiting," 
but the peculiar service that only money can perform, namely 

"We must of course assume that in this illustration the element 
of risk is absent, for the problem of pure interest must be viewed apart 
from the item of insurance. 



266 DISTRIBUTION OF WEALTH [202 

that of making payments in the course of business. A par- 
tiality for money can be observed not only among borrowers, 
but also among possessors of wealth who are offering it for sale. 

"What is the reason of all this desire to get money? A 
strongly marked demand for money in exchange for products 
is manifested in every province of the industrial and com- 
mercial world. The struggle of competition resolves itself into 
efforts to get money for merchandise (345). Vast sums are 
expended in the process of selling. Efficient salesmen com- 
mand high salaries. Even unfair means are at times resorted 
to in efforts to drive competitors from the field. The ceaseless 
search for markets and the persistent efforts to sell are re- 
flected in the prevailing belief that the prosperity of nations 
is enhanced when they export more than they import, when 
they send out more present goods than they receive. This 
belief induces governments to encourage selling and discour- 
age buying, promoting exportation by bounties and impeding 
importation by tariffs. Even wars have been waged for the 
purpose of securing foreign markets for the home products. 
Indeed, the persistent outcry for tariffs during the so-called 
periods of prosperity as well as during times of depression 
irrefutably proves that there is a constant excess of the supply 
of things over the effective demand, and a constant preponder- 
ance of unrequited "waiting," not only during periods of 
business stagnation, but at all times. Well may we ask, why 
is it that the mere medium of exchange is so much more in 
demand than products, the very ohjects of exchange (204, 
211) ? Can the "Positive Theory" furnish an answer to this 
question? Since money more than any other form of wealth 
is sought by would-be borrowers, the theory that accounts for 
interest should afford light on this question. Let us see. 

202. Money Never " Present Goods." — Of the goods that 
are offered in the market some are near the point of economic 
maturity, others are not. Some are practically mature or 
present goods, like foodstuffs, clothes, furniture, articles of 
luxury. Others are immature goods, such as cotton, dry- 
goods, steel rails, machines. They require a greater or less 
time for their conversion, by industrial or other processes, 
into consumable goods or desired services. All of them are 



203] CAPITAL GOODS AND RETUHNS 267 

adapted to render gratification, directly or indirectly, sooner 
or later, after their sale is effected. 

But what is the status of money ? What gratification does 
it offer to the consumer? Neither borrowers who obtain 
money in exchange for their credit, nor manufacturers, mer- 
chants and workmen, who accept money in exchange for goods 
or services, do so with the intention of actually using it up. 
Those who accept money in exchange as well as those who 
borrow it expect to part with it without altering its condition. 
The utilization of money in the way of bodily consumption 
is not sought by those who acquire it ; and not being adapted 
to be consumed by its holder, money is the most typical form 
of * ' future goods. ' ' Hence, a loan of money, instead of being 
an exchange of present for future goods, is an exchange of one 
form of future goods for another form of future goods. The 
borrower gives his "promise-to-pay," that is to say, his credit, 
in exchange for the banker's "promise-to-pay," or credit. 
And if the banker gives gold coin instead of mere bank credit, 
that which he gives, like the borrower's promissory note, 
consists of strictly "future goods," ikat is, of goods not in- 
tended for consumption, nor, indeed, so adapted except when 
destroyed as money by being melted down for use as gold 
metal. 

From this it is apparent that the lending of money cannot 
be considered as a giving of present in exchange for future 
goods. 

203. Money Never a Means of Production. — Nor, indeed, 
can money properly be classed with means of production, or 
capital goods (130). Such classification of money is clearly 
inadmissible. Although money is universally regarded as 
capital, it is certainly not of the kind to which the reasoning 
of the "Positive Theory" can be applied, even assuming that 
this theory were otherwise valid. The argument adduced for 
classing money with goods in storage and with means of trans- 
portation as being a tool of commerce and therefore a form of 
capital goods ^" proves on analysis to be untenable. Stored 
goods are goods in process of maturing, at least so long as 

'» Bohm-Bawerk, II, p. 66 (70). . 



268 DISTRIBUTION OF WEALTH [203 

the storage is a normal part of the process of preparing the 
goods for the market. They are passing through the com- 
mercial stage of production, namely the process normally neces- 
sary to transfer them from the producer to the consumer. 
During the normal period of that storage the value of the 
goods increases, this increase comprising the cost of storage 
plus the interest supposed to accrue through the gradual 
growth of value, as future utilities become present ones (133), 
Money presents a radically different case. Turning gold from 
its commercial form as bullion into its conventional form as 
coin can in no wise be classed as a process of bringing gold 
nearer to its point of consumption. None of the latent and 
immature utilities possessed by the gold composing the coin 
is ripening into consumable utilities while the coin is being 
used as a medium of exchange. In this respect money differs 
radically from stored goods. The present value of money can 
in no wise be regarded as the discounted estimate of its future 
value. The value of money does not increase while it is either 
stored or being utilized. On the contrary, by the act of coin- 
ing the processes by which the latent utilities of gold might 
have been matured are positively arrested for an indefinite 
time, and although those utilities are likely to be brought to 
use only in the far distant future, if at all, their value is not 
discounted in consequence of the fact. Gold, when coined, is 
distinctly idle capital,^^ for the latent utilities of coined gold 
remain positively in statu quo (134), Hence the '* Positive 
Theory" cannot apply to money, even if it could satisfactorily 
explain the power of capital goods to bring interest. 

Against this reasoning may be advanced the argument that 
gold, when coined, and money generally, is adapted to perform 
a most important commercial function, namely that of mediat- 
ing exchanges and, as a commercial tool,^^ should be classed 
with "enduring goods, "*^ namely such as are capable of 
being utilized for an indefinite time. According to this view 
it would follow that just as the latent utilities of the tool of 

"C/. Bohm-Bawerk, II, p. 302 (319). « C/, ibid., p. 67 (71). 

«^C/. ibid., pp. 339 (360) ff. 



203] CAPITAL GOODS AND RETURNS 269 

production ''loom" are incorporated in the product "cloth" 
woven on it, or those of a railroad or a steamship become in- 
corporated in the things transported by their means, so the 
latent utilities of the tool of exchange, "money," become in- 
corporated in the products exchanged by its means. 

But the reasoning according to which the latent utilities 
of the loom, while being transferred to the cloth, grow in 
value by reason of the underrated future utilities becoming 
full rated present ones — assuming, for the sake of argument, 
the supposed discounting of the future to be a dominant 
economic factor — is not in any way applicable to money, as 
will presently appear. 

The process through which a loom's utility is transferred 
to cloth requires time, during which the discounted value is 
supposed to grow to full value. The latent utilities of capital 
goods in general are brought to maturity by the more or less 
continuous application of labor to them, a process involving 
time. This is not the case with money which is of service to 
its possessor only for a momentary transaction; it passes out 
of his hands the very moment he puts it to use in effecting an 
exchange of any kind, whether in making a purchase or in 
paying an account, thus serving only in a transfer of owner- 
ship of things. How, then, can we conceive a gradual increase 
of value, as the supposed underrated future becomes full- 
rated present, seeing that the utilization of money is but a 
momentary transaction ? 

But there is more to be said on this point. Experience 
shows that when cloth is produced on a loom, the value of the 
cloth exceeds the value of the yarns plus the cost of weaving, 
the latter including wear and tear of the loom, etc. This 
excess is the interest accruing to the capital invested in the 
process of weaving. When goods are transported from one 
place to another, it is because they have a higher value at the 
point of destination than where they are produced, and here 
we also find that the difference of value — the price of transpor- 
tation — exceeds the cost of the process inclusive of loss through 
wear of rolling stock and road bed. This excess is the in- 
terest accruing to capital invested in the means of transpor- 



270 DISTRIBUTION OF WEALTH [203 

tation. "When wine is stored for ageing, the increase of its 
value exceeds cost and risk of storage, and the excess affords 
the interest of the capital invested. But when money is used 
in payment for goods purchased, neither the goods nor the 
money show any gain in value. Everybody realizes that "while 
a man keeps money, he loses interest on it." A borrower of 
money begins to reap interest only after he has parted with the 
money, and then only out of the capital goods he has obtained 
through it. It is thus apparent that the function of money is in 
no way analogous to that of means of production, and that the 
relation of money to interest is radically different from the 
relation of capital goods to interest. From this it follows that 
the causes which compel a borrower of money to pay interest 
for its use are totally different from those which compel the 
borrower of capital goods to pay interest for their use. 

The function of money differs radically from that of 
capital goods (211). Money is in no wise essential to the 
processes of forwarding capital goods from the immature to 
the mature state. These processes are those of changing the 
form, composition or location of things, or of protecting them 
against destruction. The function of money is solely that of 
mediating changes of ownership of the things produced or in 
process of production. Money is not a tool of construction, 
but only a tool of exchange. For constructive purposes money 
possesses no utility whatsoever, and for the purposes of ex- 
change a system of bookkeeping would answer as well (90). 

From whatever standpoint we approach this question, we 
can find no justification for classing money either with "pres- 
ent goods" «* or with "capital goods," «^ if the latter are con- 
ceived as consisting of future goods ripening into present 
goods. Money as such is essentially idle or dead capital and, 
like credit, must logically be classed with "future goods," and 
as such it is not even ripening into a present good. The 
supposed undervaluation of the future, therefore, cannot pos- 
sibly explain why men are so anxious to get money for mer- 
chandise, and why borrowers, who have quantities of mer- 

^Cf. Bohm-Bawerk, II, p. 285 (300). "''Of. ibid., p. 66 (70). 



204] CAPITAL GOODS AND RETURNS 271 

chandise unused on their hands, so willingly pay interest for 
the loan of money. 

204. Calvin's Reasoning. — As already stated, John Calvin, 
even as far back as the sixteenth century, undertook to explain 
the willingness of borrowers to pay interest on the ground that 
it is not the money that brings a legitimate earning, but the 
house, or the field obtained in exchange for the money (190, 
237) . Idle money, he realized, is sterile ; but the borrower does 
not keep it idle; he acquires in exchange for it something 
that is productive. And this is indeed the view taken by the 
business man generally. He borrows money because money is 
freely accepted in exchange for any form of wealth suited to 
his purpose. With the borrowed money he buys capital goods, 
and by working with them he derives that profit which is here 
under consideration. 

But by taking for granted that with money, which does 
not afford interest to the user, there may be bought any kind 
of capital goods which do afford interest to the user, we are 
brought back to the point from which we started (201). We 
started to find out why it is that there is a greater demand 
for the medium of exchange than there is for the objects of 
exchange ; we were looking for the cause of the general desire 
of men to get money for merchandise, that is, a future good 
in exchange for a present good, and are brought to a point 
where we find that cause to be the universal readiness of men 
to give merchandise for money, that is, present goods for 
future goods. Calvin's argument, so generally accepted, is 
simply a case of reasoning in a circle (242). While there is 
no difficulty in explaining, consistently with the "Positive 
Theory," the willingness of men to give merchandise in ex- 
change for capital goods, that is, present goods in exchange 
for future goods, the value of which increases as time advances 
— this value being equal to the discounted value of their future 
utilities — we have thus far found nothing to explain their 
willingness to give merchandise for money, that is, present 
goods in exchange for future goods, the present value of which 
equals the undiscounted value of their future utilities, a value 
which does not increase as time advances. 



272 DISTRIBUTION OF WEALTH [205 

Even if it were really true that capital goods, the instru- 
ments of production, command interest because of the under- 
rating of the value of future goods, it still would not follow 
that interest accrues to money for the same reason. The ex- 
planation adduced by Calvin is no more valid than that pro- 
pounded by Turgot in what Bohm-Bawerk has termed the 
"Fructification Theory of Interest," the fallacy of which he 
himself so conclusively shows.*® 

205. Interest as an Inducement to Production of Capital. 
—On a par with the theory of the discounted future is the 
earlier idea, which forms the basis of Turgot 's theory, that the 
power of capital to bring interest is an inducement essential 
to the production and investment of capital (190, 317). 

This idea is tersely expressed by the question propounded 
by Bohm-Bawerk, whether — 

a man of affairs would permanently continue an enterprise in which 
the invested capital does not earn interest.*^ 

To be sure, no business man would do so while capital can 
be invested in other enterprises that do return interest. But 
when the nature and cause of interest are in question, it is 
illogical to assume that interest exists in the very nature of 
things. We should inquire whether a manufacturer of, say, 
knit gloves, having the choice between making them by hand 
or by machine, would really be so shortsighted as to choose the 
primitive method just because the machine method, although 
yielding more products in the end, will not do so from the 
beginning. The gain in productivity, and eventually in time 
also, through the employment of capital is in itself an induce- 
ment for the employer to apply it in production. Since the 
income of the employer as such is what is left of the value of 
his products after all costs have been defrayed (167), he, 
more than anyone else, is interested in adopting the most 
efficient method of production (318), and to him it is imma- 
terial whether he gets this residual share as interest or as 
wages. If he does not keep up with the progress of the time, 
he cannot hold his own against competition. The supposition 

»« Bohm-Bawerk, I, pp. 61 (71) ff. 

^ Quarterly Journal of Economics, January, 1896, p. 141. 



206. 207] CAPITAL GOODS AND RETURNS 273 

that interest is necessary as an inducement to the employment 
of capital, whether in the starting or in the continuance of 
enterprises, is clearly without foundation. 

206. Summary. — From the foregoing it follows that the 
premises of the *' Positive Theory" are groundless. The in- 
direct and complex methods of production, involving the em- 
ployment of capital, instead of being protracted, are in fact 
expeditious when compared with simpler and more direct 
methods. Even though "waiting" be considered as involving 
effort, the waiting required by capitalistic production between 
the time of effort and of the consequent gratification is much 
more than compensated by the increase of productivity. "When 
compared with the time of "waiting" required by primitive 
methods of production, the period of increased waiting in- 
cident to the use of capital is terminated in a brief space of 
time and is therefore to be considered as a concomitant of 
progress and not of capitalistic production. 

But we cannot even find any facts in the business world 
that would justify the assumption that "waiting" is econom- 
ically to be accounted as effort, or, to put it otherwise, that 
the preference of "present" over "future" goods is adequate 
to account for pure interest ; and since money cannot properly 
be classed either with present goods or with capital goods, the 
theory, even if it were competent to account for the "earn- 
ings" of capital goods, cannot in any way account for the 
power of money to command interest. Moreover, the assump- 
tion that interest is essential as an inducement to the accumu- 
lation of capital is, in the last analysis, found to be un- 
warranted. It is manifest that the phenomenon of interest 
is due to economic forces other than those adduced by the 
author of the ' ' Positive Theory of Capital ' ' to explain it. 

207. The " Surplus Value " Theory. — The theories thus 
far considered are attempts to trace capital returns to natural 
causes and so to explain interest. On the other hand, the 
"Surplus Value Theory" of Karl Marx, propounded in his 
work "Das Kapital," ascribes these returns to some sinister 
influence of the prevailing system of * * capitalistic production ' ' 
and a supposed exploitation of labor involved in that system. 

18 



274 DISTRIBUTION OF WEALTH [208 

Capital returns and money interest are accordingly condemned 
as morally indefensible. The theory is substantially as follows : 

Under the capitalistic system of production the workman 
who has no capital is compelled to sell to a capitalist his "labor 
power ' ' which, as a merchandise, has a value measured by the 
labor time required for its "production" (164a). This value, 
then, is the purchase price of labor power ; it is that which is 
called ' ' wages. ' ' The capitalist buys labor power at this value 
by paying wages. It costs him only an amount measured 
by the labor time required for the production of the means 
of subsistence and propagation of the laborer. A day's labor 
power costs what can be produced by, say, a half -day's labor 
time. But having bought it, the capitalist puts it to work for 
the whole day, and the value produced is greater than the cost, 
the difference being "surplus value" which is appropriated 
by the purchaser of the labor power, the capitalist. 

This theory is founded on the wage theory advanced by 
the same author. The fallacy of the wage theory having 
already been pointed out (164&), this would in itself be reason 
enough to dismiss the matter without further comment; but 
as the theory itself is in conflict with every-day experience, a 
few more words on the subject may not be amiss. 

208. The Theory Inconsistent with Facts. — According to 
the surplus value theory the capitalist, in order to acquire 
surplus value, need do nothing more than buy labor power 
and put it to work. If the acquisition of riches were really 
such a simple matter, it would be inconceivable that any of the 
labor power offered in the market would ever go begging for a 
purchaser. The demand for it would be so great that none 
would be left for sale. 

But what do we find in reality? The question of how to 
provide work for the unemployed has long been a serious 
political and economic problem the world over. This is in 
direct conflict with Marx's thesis. It is true, endeavors have 
been made to harmonize the surplus value doctrine with these 
facts by pointing out that so long as the workers receive wages 
amounting to only a portion of the value which they produce, 
they are unable to buy all of their products with their wages. 
That portion of the remainder which is not consumed by the 



208] CAPITAL GOODS AND RETURNS 275 

capitalists must remain unsold, and this, it is alleged, accounts 
for what is called "overproduction" and for the consequent 
lack of employment. 

But this explanation conflicts with Marx's characterization 
of capitalists as being possessed of an insatiable greed for sur- 
plus value. Having gotten the surplus value, why should they 
put it on the market for sale? After purchasing the labor 
power, they can control production so that only part of the 
labor is applied to the production of the necessaries of the 
workers and another part to the production of those forms 
of wealth for which they are so greedy and which, after being 
appropriated by them, would not have to be put on the market 
and so cause an excess of supply over demand. The deplor- 
able fact that business depressions- and lack of employment 
are features of the present industrial system conclusively dis- 
proves the reasoning of Karl Marx. 

During periods of business stagnation, whatever their cause, 
the competition among workmen for employment results in a 
reduction of wages. Low wages, then, are the result of an 
insufficient demand for labor. To harmonize the socialistic 
theory with facts it is asserted, on the contrary, that low 
wages are not the result, but the cause of the accumulation of 
unsold products and the consequent low demand for labor. 
This is clearly a case of '^putting the cart before the horse," 
of confusing cause and effect. 

Marx has evidently taken a one-sided view of industrial 
affairs. He wholly overlooked the significance of the intermin- 
able series of failures and bankruptcies in the "capitalistic" 
world. Facts do not bear out the notion that employers gen- 
erally are the recipients of "surplus value." Business men 
keenly feel the difficulty against which they must contend. 
It is not a rare thing that wage workers, so called "wage 
slaves," accumulate enough capital to become "capitalists" 
themselves, only to lose as employers all they had saved as 
employes. 

The "Surplus Value Theory" not only lacks logical basis, 
but is also completely disproved by the constant occurrence 
of business failures and by the frequent recurrence of business 
depression. 



CHAPTER XI 

MONEY AND MONEY INTEREST 

209. Interest on Money Loans. — ^Up to this stage of our 
discussion we have used the term ' ' capitalist ' ' as including not 
only the owner or owners of the capital employed in a busi- 
ness, but also the lender or lenders of any money employed 
therein. But in examining the relation of the income of the 
money-lender to that of the capitalist, we must distinguish 
the lender of money used in a business from the "capitalist" 
who owns only the remaining part of the capital. 

When the capital of a productive group is owned in its 
entirety by the capitalist of the group, its returns accrue to 
him alone. But when a portion of the capital is obtained by 
borrowing money, the capital returns are shared between the 
capitalist and the money-lender through the payment of in- 
terest on the borrowed money. In the average the sharing is 
about in proportion to the parts of the total capital owned 
by the capitalist and the money-lender respectively. 

It is commonly held that when a business man borrows 
money to increase his working capital, he is willing to pay 
interest on the loan because that increase of capital affords 
him an increase of profits (186, 257). From this it would 
follow, as Calvin and others have insisted, that the interest 
is paid, not for the use of money, but for the use of the capital 
goods bought with the monej^ No business man borrows 
money for the purpose of keeping it; he intends to use it in 
payment for things or services, or in paying debts for things 
or services already received. 

This view is clearly presented by many writers on 
economics. According to Simon Newcomb : 

What the borrower really pays interest for is capital, not money. 
The borrower can gain nothing by keeping the money; all he borrows it 
for is to purchase some kind of capital. . . . We see then that what 
276 



210] MONEY AND MONEY INTEREST 277 

is called the rate of interest on money is not a property of the money 
itself, but depends upon the advantage which capital gives its owner in 
production.** 

John Stuart Mill went into greater detail in trying to 
show that the interest paid on borrowed money is really paid 
for the use of capital goods bought with that money. 

Money, which is so commonly understood as the synonyme of 
wealth, is more especially the term used to denote it when it is the 
subject of borrowing. When one person lends to another, as well as 
when he pays wages or rent to another, what he transfers is not the 
mere money, but a right to a certain value of the produce of the country 
to be selected at pleasure, the lender having first bought this right by 
giving for it a portion of his capital. What he really lends is so much 
capital; the money is the mere instrument of transfer. But the capital 
usually passes from the lender to the receiver through the means either 
of money, or of an order to receive money, and at any rate it is in 
money that the capital is computed and estimated. Hence borrowing 
capital is universally called borrowing money; the loan market is called 
the money market; those who have their capital disposable for in- 
vestment on loan are called the monied class; and the equivalent given 
for the use of capital, or in other words, interest, is not only called 
the interest of money, but by a grosser perversion of terms, the value 
of money." •* 

It is manifest from the above quotation that Mill clearly 
distinguished between * * money ' ' and ' ' capital, ' ' using the term 
"money" as meaning a credit instrument conveying a right to 
receive value, and the term "capital" in the sense of capital 
other than money, which cannot be anything else than capital 
goods. 

210. Money Interest is Paid for the Use of Money. — On a 
close examination of the argument presented by Mill, the 
conclusion of which is re-stated by Newcomb and others, it 
will be found that this conclusion is not warranted by the 
premises. It is assumed in the argument that what the bor- 
rower is seeking is capital and not money. Investigation, how- 
ever, discloses the fact that what the borrower is after is money 
and that the interest which he pays to the lender of money is 
paid for the use of money and not for the use of capital. 

"" Newcomb, pp. 305-306. " Mill, II, pp. 25-26. 



278 DISTRIBUTION OF WEALTH [210 

The hypothetical case presented by Mill is found to em- 
brace in its scope three independent transactions effected 
between four different parties, of whom the second is the 
lender and the third the borrower in the ease. 

The first of the four is the initial owner of the money 
from whom, in the first transaction, the second party, our 
lender, obtains the money "by giving for it a part of his 
capital." In the second transaction the second party, the 
lender, loans this money to the third party, the borrower. Then 
comes the third transaction in which the borrower uses the 
money in getting actual capital from the fourth party by way 
of purchase. 

The first transaction is a sale of capital, described by Mill 
as an exchange of "a portion of his capital" for a "right to 
a certain value of the produce of the country to be selected 
at pleasure." This is clearly a call loan of real capital, inas- 
much as the second party can get back an equivalent of his 
capital "at pleasure." So long as he refrains from getting it 
back, he is a creditor. Does he receive interest for this call 
loan? By no means. The certificates which he obtained for 
his capital, and which prove that he is a creditor, are not 
merely credit instruments; they are money. But this does 
not change the fact that while possessing the money he is a 
creditor (89). He being a creditor, who is the debtor? Is it 
the first party to whom he gave "a portion of his capital" in 
exchange for the money ? Not at all. Before the first transac- 
tion took place, that first party, as possessor of money, was a 
creditor who merely received "a certain value of the produce 
of the country" when he bought the capital of the second 
party, the lender. The real debtor in the case is the issuer of 
the money who, when he issued it, received actual wealth in 
exchange for a mere credit instrument (92). Does the second 
party, while holding the money, that is, a "right to a certain 
value," obtain interest from that real debtor? "We all know 
that he does not (264a). The credit instrument he received 
is money, something for which he can get interest if he lends 
it out. 

In Mill's account of the case he does lend it out to our 



210] MONEY AND MONEY INTEREST 279 

third party, the borrower, and takes his promissory note for it. 
This constitutes the second transaction. The lender, the second 
party, having obtained from the first party a right to a certain 
value, turns it over to the borrower in exchange for the latter 's 
promise to pay. It will be observed that we have here an ex- 
change merely of two credit instruments, namely money on 
the one hand and the promissory note on the other, and that 
no real capital, no capital goods, change hands. Following 
this exchange the lender is still creditor. It is true, he no 
longer possesses a ''right to a certain value of the produce of 
the country to be selected at pleasure, ' ' but in its place he has 
the promissory note which conveys a right to a certain value 
of the borrower's possessions (68). The borrower is now both 
debtor and creditor ; debtor as the maker of the promissory 
note, and creditor by reason of holding a "right to a certain 
value, ' ' the money. But from the moment of this transaction, 
in which no transfer of capital takes place and which consists 
merely of an exchange of two credit instruments, the borrower 
pays interest to the lender. Is this interest paid for capital 
received ? By no means, for the borrower does not receive any 
capital; he receives only one kind of credit instruments for 
another kind. To be sure, this kind of credit instruments 
conveys a universally recognized right to a certain "value of 
the produce of the country," realizable at any moment; it is 
money, while that which he gives in exchange is but a promis- 
sory note, and as such is recognized only as a claim to a certain 
value of that portion of the produce of the country which is in 
possession of the borrower, and which is realizable only at a 
stated future time. If the borrower pays the interest for the 
use of capital and not for the use of money, as is generally 
held, what capital is it, and whose? According to the gen- 
erally accepted theory, which Mill only paraphrases, the 
lender uses the money merely as an instrument for trans- 
ferring capital to the borrower. But the lender has already 
transferred the capital in question to the first party, the one to 
whom he sold it and from whom he got a receipt therefor in the 
form of money. He certainly cannot transfer this capital 
also to the borrower, and it is therefore certain that the bor- 



280 DISTRIBUTION OF WEALTH [210 

rower does not pay interest for the capital which has been 
furnished by the lender of the money. It is true, the borrower 
does ultimately get capital, but he gets it from the fourth 
party when, in the third transaction, he pays the money for it. 
Does he pay interest to the lender of the money for the use of 
that capital ? If so, why does he begin to pay interest before 
he receives that capital, and why does he not pay it to this 
fourth party from whom he gets the actual capital? 

The facts of the case cannot reasonably be interpreted 
otherwise than that the interest is paid for the use of the 
money and not for the use of the capital (134, 241, 2646). It 
is counted from the moment a credit instrument which is 
money, is given for a credit instrument which is not money, 
but never from the time when actual capital, which has the 
capacity of being utilized in production, is given for money 
which has no such capacity. It is paid to the man who gives 
money in exchange for a promissory note, but not to the man 
who delivers the real capital in exchange for the credit instru- 
ment, money. The obligation to pay interest manifestly 
originates in transactions in which credit in the form of money 
is exchanged for credit that is not in the form of money, but 
never in those transactions in which real capital is exchanged 
for credit in the form of money. The only reasonable con- 
clusion is that interest is paid for the advantage afforded by 
credit which is in the form of money over credit that is not 
in the form of money. Interest is paid for the use of money 
and not for the use of capital goods. The time-honored notion 
that interest is paid to the lender of money for the use of 
"capital" is groundless. 

The fallacy of the idea that capital is transferred from 
the lender to the borrower through the medium of money (211) 
is the most apparent when the money loaned is in process of 
being issued through the agency of the lender. The money 
issued, say, through a national bank, has not been obtained 
by that bank in return for "a portion of its capital," but in 
return for the deposit merely of a security in the form of 
bonds, which security, however, remains the property of the 
bank together with all its usufruct. Here is plainly a ease 



211] MONEY AND MONEY INTEREST 281 

where the main basis of Mill's argument, namely, that money 
is the instrument of transferring capital, is illusory, inasmuch 
as the lender has not transferred capital — ^that is, capital 
goods — in getting the money, and does not transfer capital in 
lending it. And yet, he gets interest. 

211. The Industrial Function of Money. — Our conclusion 
that the borrower of money pays interest for the use of money 
and not for the use of the capital goods he buys with the 
money seems to conflict with the obvious fact that interest is a 
share of the wealth produced when labor and capital goods 
are conjointly employed in the process of production. Money 
plays no part whatever in the wealth-producing process, its 
function being that of merely facilitating exchanges. Hence 
it is the provider of capital goods who furnishes that through 
which labor is enabled to create the wealth out of which in- 
terest is paid, and not the provider of money; and yet, we 
have here the incongruity that interest is paid to the lender of 
money and not to him who, when he gives goods in exchange 
for money, which is only a credit instrument (89) , becomes the 
real lender of the capital goods, the lender of that which is 
the real embodiment of human effort. 

Before we can find our way out of this labyrinth of seem- 
ing contradictions, we must learn how and why it is that 
capital goods, capable of yielding an income when employed, 
are so freely offered for money which cannot be used in the 
process of production (201). This we can do by carefully 
analyzing the real function which money performs in the 
industrial and commercial world. 

In the modem industrial world products are advanced 
from crudest forms to the finished state by the efforts of suc- 
cessive groups of workers (127). Each group receives as its 
own raw materials the completed products of the preceding 
groups and advances them one step forward toward maturity. 
To illustrate, the group represented by the cloth manufacturer 
obtains from other groups looms and yarns which are used in 
the manufacture of cloth. Although the finished product, 
the cloth of our illustration, is by no means a mature com- 
modity, the group represented by the cloth manufacturer is 



282 DISTRIBUTION OF WEALTH [211 

not in a position to further advance it, for the function of 
this group is restricted to the forwarding of the product by 
that one step. The cloth manufacturer is not also a tailor. 
For him the cloth is idle capital (243), and in order to con- 
vert this idle capital into active capital, it must be sold and 
the proceeds applied to the purchase of material for producing 
cloth. To this end the maker of the cloth sells it off as fast 
as he can, and with the money obtained he pays the wages 
of his employes and buys yarns and other supplies. 

Here we find a leading thread in the maze. When a busi- 
ness man gives capital goods in exchange for money, he gives 
capital which has become idle for him, in exchange for money 
which is likewise idle for him so long as he keeps it. But 
although the money is idle capital, it is more useful to him 
than the idle capital which he gave for it, because the money 
is a means through which he can acquire that which to him is 
active capital. In the processes of production active capital is 
constantly advanced hy each productive group to a stage in 
which it hecomes idle capital for that group, and money is a 
means through which this idle capital can he exchanged for 
capital which is active for that group (203, 241a, 242, 245). 
When capital goods are sold by one group to another, the 
goods which are idle capital to the seller become active capital 
to the buyer. 

The bricks in a brick-yard, the lumber in a saw-mill, the 
engines and the looms in the hands of the machine builders, 
the yarns made by the spinner and all other tools and sup- 
plies needed in the manufacture of cloth can become active 
capital only when these things have been assembled in the 
construction and equipment of the cloth factory. If a single 
essential element of the combination is lacking, the other fac- 
tors cannot be used and are idle capital until the missing 
element is supplied. Considering that it would be practically 
impossible to bring these things together in their proper com- 
bination if we were confined to simple barter as the only 
method of exchange, we can clearly see that money is the 
only effective, the only practicable medium by which they can 
be assembled and turned into active capital. Without money 



211] MONEY AND MONEY INTEREST 283 

in some form the things of which capital is made up might 
separately be brought into existence, but the peculiar com- 
binations by which they become active capital could scarcely 
be brought about, except, perhaps, in a communistic society. 
In an individualistic community the effective aggregation of 
the things of which capital is made up is possible only through 
the medium of money. 

The illustration may be further varied. Suppose a cloth 
manufacturer wants to borrow some additional capital, and a 
friend who is tanner offers to lend him some of his capital 
consisting of tanned hides. He would, of course, decline the 
offer. The tanned hides might be capital to a shoe manufac- 
turer, but not to the maker of cloth. When our would-be bor- 
rower is in need of capital, he does not want an indiscriminate 
lot of capital goods. He wants only those particular things 
needed in his business, namely the things he is prepared to 
advance toward maturity. Since money alone will enable him 
to obtain, in the requisite combination, the different things he 
needs, he will borrow money and not capital goods. 

The specific faculty of money which accounts for the uni- 
versal demand for it may be still further elucidated by the 
example of a cloth manufacturer who wants to get a number 
of additional looms and who has to borrow money to get them. 
Here three persons are involved: a man who has $10,000 to 
lend out,"" a manufacturer who owns a factory worth, say, 
$50,000, the capacity of which he desires to increase, and a 
machinist who has a stock of looms worth $10^000. 

The manufacturer now borrows the $10,000 and applies 
this money to the purchase of the looms. The conditions be- 
fore and after this transaction are as follows. 

Before the transaction the lender held a claim against the 

*° We must always remember that money is in essence a claim 
against its issuer which, by communal convention, is recognized as a 
" right to a certain value of the produce of the country " by all who 
have anything for sale. Although these latter are not the debtors, 
they are ever ready to satisfy the claim by giving goods in exchange 
for it. 



284 DISTRIBUTION OF WEALTH [211 

community amounting to $10,000. The manufacturer owned 
a $50,000 factory. The machinist had a stock of looms. 

After the transaction the lender has a claim against the 
manufacturer to the amount of $10,000 who, in turn, is in 
possession of a $60,000 factory of which he owns virtually only 
live-sixths, the other sixth being owed to the lender. In place 
of his looms the machinist has nothing more than a claim 
against the community amounting to $10,000. It is further- 
more to be observed that from now on the manufacturer is 
under obligation to pay interest on $10,000 to the lender. 

We have already found that the lender receives this in- 
terest because he has given credit which is money in exchange 
for credit which is not money, and that interest is paid for 
the advantage afforded by money. We know also that it is 
not paid for the loan of capital goods, for the borrower did 
not get the looms from the lender. The capital which the 
lender gave up when he himself got the money was given to 
another party, and when giving up his capital goods for a mere 
right to get their equivalent in other goods on demand, a pay- 
ment of interest for this call loan was neither stipulated nor 
expected. 

The transaction has resulted in the manufacturer increasing 
his active capital through the addition of looms, and, as is well 
known, this capital yields returns. But it will be noted that 
the manufacturer received these capital goods from the ma- 
chinist, and not from the lender. No one but the machinist 
has given up actual products of labor in the transaction. He 
finds it necessary to give up the looms, which are real capital, 
in return for money, a mere credit instrument, because in 
the course of specialized production his looms have become idle 
capital to him, while they are adapted to be active capital only 
to the cloth manufacturer. By means of the borrowed money 
the looms were transferred from the machinist to the manu- 
facturer and have been turned from an idle into an active 
state, from a state in which they were unable to yield returns 
into a state in which they do yield returns. This conversion is 
effected through the peculiar faculty of money which enables 
the manufacturer to select from among all the products of 



212] MONEY AND MONEY INTEREST 285 

the market such as can be utilized by him as active capital. All 
this conclusively proves that interest is paid for the loan of 
money because money has the faculty to convert idle into 
active capital, and not for the loan of capital other than money. 
The borrowed money was not the means for transferring 
"real" capital from the lender to the manufacturer (210), 
for the lender did not have that capital to transfer, and the 
looms which the manufacturer received belonged to the ma- 
chinist, hence the lender had no right to order their delivery. 
Nor did the machinist deliver them for the reason that the 
lender of the money had previously given capital goods to 
some one for the money. He took the money for his machines 
solely because the money possesses a certain special faculty. 
There is no foundation whatever for the idea that the function 
of the money was to transfer real capital from the lender to 
the borrower. What the money did accomplish was to turn 
the idle capital of the machinist into active capital of the 
manufacturer through the process of selective exchange. The 
facts unmistakably indicate that interest on money loans is 
paid for the use of that faculty of money which enables the 
borrower to select in the market the particular things needed 
in the composition of active capital. 

But here we again lose the thread that seemed likely to 
lead us out of the maze. In order to account for the readiness 
of the manufacturer to pay interest for borrowed money, we 
had to fall back on the experience that active capital, that is, 
capital goods employed in productive processes, yields interest. 
But what it is that imparts this power to capital is still in- 
volved in the maze, and until we recover the thread, we cannot 
reach a conclusive explanation of interest itself (241&). 

212. Efficiency of Money. — Money being the instrument 
for turning idle capital into active capital, it follows that 
without money the specialization of industry would be im- 
possible, and all the advantages arising from systematized 
processes of industry and commerce would be unattainable. 

Let us consider what would happen if we had to get along 
without money in any of its forms and depend for all our 



286 DISTRIBUTION OF WEALTH [213 

exchanges on simple barter. It can readily be seen that under 
such conditions practically all business must come to a stand- 
still. Merchants could not sell their goods and manufacturers 
could not pay wages. All inventions of the past would become 
useless, and we would relapse into a state of primitive life. 
Men could co-operate only in those simple pursuits in which 
the results of labor could be shared directly among the par- 
ticipants, or readily exchanged by barter. A man could obtain 
bread from the baker or meat from the butcher only if he 
chanced to have something of which the baker or the butcher 
happened to be in need and which they are willing to accept 
in exchange. Since development of industry would be im- 
possible where the method of exchange is so primitive, we 
would be without any of the benefits of applied science. 

Suppose, now, that a small amount of money were intro- 
duced into a moneyless community. Exchanges would there- 
upon be somewhat facilitated and correspondingly increased, 
and a limited division of labor would naturally be developed. 
A second, a third, a fourth addition to the amount of money 
would permit a further increase of commerce and the ex- 
tension of specialization of industry to a corresponding degree. 

The first instalment of money would naturally seek those 
channels of production and exchange where it is most needed 
and most effective, and would open up opportunities for the 
most immediate steps in the division of labor. The second in- 
stalment, finding the channels of the first order filled, would 
flow in directions of less imperative necessity, or channels of 
the second order, permitting a further division of labor, the 
advantages being not quite as great as those attained through 
the first instalment. A further addition would similarly fill 
the channels of the third order, and so forth. Each successive 
addition would enable producers to avail themselves of more 
of the advantages of specialized labor, but the efficiency of 
each succeeding instalment, viewed by itself, would be less 
than that of the preceding one. 

213. Final Efficiency of Money. — It is clear that in the 
above illustration each new addition to the volume of the 
medium of exchange would flow into the most important chan- 



214] MONEY AND MONEY INTEREST 287 

nels yet open and would permit a corresponding degree of 
further development. Just as the available supply of any 
class of commodities is used for the most important require- 
ments, as far as the supply goes, so the available volume of the 
medium of exchange would be applied, as far as it would reach, 
to those uses through which the most advantageous specializa- 
tion of work is attainable. As the final utility of any class of 
goods is determined by the least urgent of the needs that can 
be supplied from the quantity of goods available, so is the final 
efficiency of money determined by the least remunerative of 
all the industrial developments which can be effected by means 
of the available supply of money. The final efficiency of money, 
then, is equivalent to the benefit afforded by the last of the 
several instalments added to the volume of money (238), 

A diagram may again be used to advantage for illustrat- 
ing this principle. Let the increasing volume of money be 
measured on the horizontal axis and the efficiency of each in- 
dividual instalment on the vertical axis of Fig. 22. The 
gradual decrease of the efficiency of the consecutive instal- 
ments is then represented by the descending curve EE'. 

When the gradually increasing volume of money has 
reached the magnitude OV, the efficiency of the last increment 
will be rated by the ordinate Y'a', while the efficiency of the 
total volume then in use will be represented by the area OV'a'E. 
A further increase of the volume to OV will reduce the final 
efficiency to the rate Va and at the same time increase the 
efficiency of the total volume of money to the area OYaE. 

As we have found that interest is paid for the advantages 
afforded by money in its capacity as a medium of exchange, it 
would appear, from analogy, that the rate of interest is some- 
how related to the iinal efficiency of money, but a closer in- 
vestigation of that which actually determines the interest rate 
must be deferred to another point of our discussion (244-256). 

214. Significance of the Phrase " Efficiency of Money." — 
In the above argument we have gauged the * ' efficiency of 
money" by the total product of industry obtained through 
the employment of money. But the fact is that the product is 
a result of several co-ordinate factors of which money is but 



288 DISTRIBUTION OF WEALTH [214 

one. It is clearly unreasonable to give credit for the whole 
product to money alone, inasmuch as the other factors are at 
least equally indispensable. Money and capital goods are 
equally means to enable labor advantageously to exploit land. 
The phrase "efficiency of money," as we have used it, is really 
the measure of the productivity of land, labor, capital and 
money combined, and since we have yet before us the unsolved 
problem of the relation of capital goods and money to labor and 
land, the term should really be understood as meaning "effi- 
ciency of labor, capital and money applied to land." 

But the final efficiency of money is only a fraction of what 
we have above considered as its total efficiency, and while we 
have as yet found no conclusive proof that it is this final 
efficiency of money which governs the rate at which the money- 
lender participates in the division of the wealth produced, it 
would yet appear, from analogy, that such is the case. Turn- 
ing to our diagram Fig. 22, we find that if OF were the volume 
of money, and producers were obliged to borrow all of this 
money from lenders, they could, by its aid, and with the total 
labor and capital other than money which they have at com- 
mand, attain a yearly output represented by the area OVaE, 
of which output they must pay a part equal to the area OVai 
as interest for the money, retaining for themselves the re- 
mainder iaE, to be shared between labor on the one hand and 
employed capital other than money on the other. 

However, until we make ourselves fully familiar with the 
forces that determine the volume of money, the problem will 
not have passed the indeterminate stage. We have found 
(195) reasons to suppose that a deficiency of available capital 
goods accounts for the power of capital goods to command in- 
terest income, and now we find that a deficiency of available 
money appears likewise to account for the similar power pos- 
sessed by money. The ground is thus cleared for further 
inquiry into the nature of interest and into the causes which 
determine the division of wealth between capital and labor. 



CHAPTER XII 

CHANCE PROFITS AND LOSSES 

215. Chance as an Economic Factor. — When the science 
of economics is studied by purely analytical methods, it is 
necessary to leave out of account all factors of a temporary 
nature and to confine the inquiry to those governing forces 
whose influence is continuous. Reverting to our illustration 
of the marksman (1) as an analogy, we must leave out of 
account the unsteadiness of his arm and other variable in- 
fluences that tend to scatter the shots. While conclusions 
reached in this way are not borne out in individual cases, they 
are nevertheless true as regards the general average. Though 
in following this plan we are chiefly concerned with general 
conditions, it is yet desirable, at this point, to give some 
attention to the effect of passing influences. 

We have all along taken for granted a number of sup- 
positions which are not entirely in accord with facts as we 
really find them. The individual has been credited with 
accurate knowledge and sound judgment which the real man 
never possesses. Every workman has been supposed to know 
his earning capacity, not alone in his actual occupation, but 
also in the occupation to which he can turn as an alternative, 
his occupation of second choice (61), and has always been 
assumed to choose that course of action which is most ad- 
vantageous to him. Prices of the same kind of things at differ- 
ent points in the same market were considered to be equal and 
known to all buyers and sellers. Moreover, we have omitted 
to take into account numerous chance disturbances in the 
domain of production and exchange. Weather conditions in- 
troduce marked uncertainty into agriculture, transportation 
and many other pursuits, and risks in endless forms are en- 
countered in every walk of life. Even a mere change in 
fashion may boom one business and ruin another. 

In the measure in which the actual conditions attending 
19 289 



290 DISTRIBUTION OF WEALTH [216 

individual cases difter from those which we have assumed, the 
actual outcome of a given set of causes varies from what other- 
wise could be reasonably anticipated. However, as regards 
the entire province of production and exchange, these varia- 
tions, in accordance with the law of probability, tend to 
balance each other in the same way as the shots of a marks- 
man on one side of the bull's-eye are practically balanced by 
those on the other. These departures from the average in 
individual cases result in chance profits or losses to individuals 
(139). 

With a view to systematize our brief survey, we may 
roughly divide profits of chance — be they positive or negative, 
profits or losses — into those that are due (1) to fortuitous 
changes of value, (2) to the varying outcome of risks assumed 
and (3) to economic inertia. 

216. Profits and Losses from Changes in Value. — It is a 
current saying that both parties to an exchange make a profit 
thereby. But this betokens a confusion of the idea of utility 
with that of value, inasmuch as each party to an exchange of 
things of equal market value gets only that which is more useful 
to him for something that is less useful to him. 

According to the definition of "value" two things are 
economically equal if they are exchanged in the market one 
for the other. The fact of their being exchanged simply estab- 
lishes their equality, but in no way adds anything to their 
existing value. The value of things may be increased by the 
work of carriers or merchants before or after an exchange, 
and this increase is often mistakenly regarded as being brought 
about by the exchange itself. 

Changes in the value of things may, however, take place 
without any effort whatever on the part of the owners of the 
things, and it is generally supposed that profits derived by the 
owners from such a change in market values are not attended 
by a loss to anyone. 

This view is erroneous, as may be gathered from the fact 
that by a mere fortuitous change in the value of a thing the 
sum total of all wealth is neither increased nor decreased, and 



216] CHANCE PROFITS AND LOSSES 291 

that, accordingly, any gain in wealth by one individual due 
merely to an increase of the value of a thing he owns must re- 
sult in a loss to the rest of the community. But if there is such 
a loss, it should be possible to point out how it arises and 
whether it falls on the whole community or only on one or 
more of its members. 

We can here consider only gains and losses that are realized 
through a double exchange, such as buying a thing at a low 
price and, after its value has changed, selling it at a higher 
price. A man holding a thing while its value rises evidently 
cannot gain any advantage from the fact that its value did 
rise, unless he sells it after its value has risen. Where the change 
in value comes about without some service being rendered, 
it can easily be shown that a profit accruing to anyone through 
buying a thing cheap and selling it dear, is invariably attended 
by a corresponding loss to others, and, of course, vice versa. 

Let us suppose, for example, that A has three hats, while 
B and C have each four dollars. If, then, C, with his four 
dollars, buys the three hats from A and, turning around, sells 
two of them to B for two dollars each, he will have a hat in 
addition to the four dollars he had before. This hat con- 
stitutes a profit which, as we shall presently see, has entailed 
a loss upon others. By grouping A and B we find that, at the 
start, they owned three hats and four dollars, and subsequently 
only two hats and four dollars. It is therefore apparent that 
by the operation through which C profited a hat, A and B con- 
jointly have lost it (224, 277). It is, however, impossible from 
these data to determine to what extent each of them is a loser, 
since dollars and hats are dissimilar things. 

The proposition here outlined has no bearing, of course, 
on cases of a possible change in the usufruct of a thing, as when 
the thing in question is land or invested capital, such as stocks 
in some enterprise. A rise of rents or of dividends is a phe- 
nomenon that must be relegated to the problem of rent or of 
capital interest, and has no place in the consideration of chance 
profits. If, however, such a rise in the usufruct is attended 
by a rise in the value of the land or of the stocks, such a rise 
comes properly within the province of the present discussion, 



292 DISTRIBUTION OF WEALTH [217 

for any fortuitous occurrence that results in a change in the 
market value of anything brings that change within the scope 
of the above conclusion. 

In these cases, however, the way in which the loss corre- 
sponding to a profit so gained becomes imposed on others is 
not so easy to trace. It is even held by many that by a rise 
in land values the wealth of a community is increased and 
that profits arising therefrom cannot entail losses on others. 
The error of this view will be shown later (329). 

217. Profits to be Distinguished from Wages. — In the 
above illustration it must be understood that what C gains 
constitutes a loss to A and B only if C, through his intermedia- 
tion, has not rendered some service to the others. If is a 
dealer whose efforts are given to the work of transferring hats 
from producer to consumer, his gain is not a profit, but a 
wage for his labor, for he earns the difference between the 
purchase and the selling price. 

Retailing is a necessary step in the process of production 
and distribution, and requires labor. Production without dis- 
tribution is an incomplete process, and the work of retailing, 
which completes the process, is an indispensable step in the 
specialization of labor and must be paid for. 

The middleman, so often denounced as a useless member 
of society, performs this important function, which certainly 
can be performed most economically through specialization. 
The mere placing of hats in a store where the customer can 
conveniently choose size, style and quality desired, adds to the 
value of the hats (12). The hats sold by C to S are in such 
case more valuable than when C bought them of A, and the 
hat gained by C through the transaction is his business income. 
So long as trade is open to competition, the business income 
of the dealer does not normally exceed wages for the work 
performed plus rent for the land occupied plus returns for 
the capital invested. Chance profits may or may not form 
part of the income, but they are likely to alternate with chance 
losses, and being but due to deviations from normal conditions, 
are negligible when general conditions are considered. 



218. 219] CHANCE PROFITS AND LOSSES 293 

2i8. Gambling. — The chance of gaining or losing through 
the rise or fall of values due to adventitious circumstances is 
an unavoidable risk in the course of production and exchange. 
But there are some classes of risks which are quite outside of 
the range of normal business. Stock speculation, gambling 
and taking lottery chances are illustrations. Ventures of this 
nature are constantly being made, even though none of these 
risks affords greater chances of gain than loss, and most of 
them even less, for some fixed cost must in any event be paid 
out of the stakes of the speculators. The fact that not a few 
people are constantly taking such chances is widely at variance 
with the assertion of some economists that men would not 
take risks unless the chances of gain exceed the chances of loss. 

219. The Element of Risk. — ^Wehave hitherto recognized 
three essential factors on which the amount of the products 
of industry primarily depends, namely labor, land and capital 
goods. There are, however, other factors that enter into the 
case, but these have a merely modifying effect. In agricultural 
pursuits the uncertainty of the weather affects the amount 
produced by a given expenditure of effort. Those who deal 
in perishable products often lose a portion of their goods by 
decay (58). In most industrial operations there is a greater 
or less amount of waste through causes which cannot be 
entirely eliminated (13), Large amounts of wealth may be 
destroyed in a few hours by fire, flood or earthquake. 

Losses of this nature become virtually a tax on production 
and are naturally followed by a corresponding increase in the 
price of the commodities affected (139, 149). Although the 
extent of such losses in individual cases varies greatly, the 
average for different periods is approximately constant for 
each specific phase of risk, and it is this average which enters 
as an item into the price of the product. The average losses 
through risks in production and distribution are therefore 
borne by the consumers of the products. 

Whenever, in any individual case, the losses actually sus- 
tained through ordinary risks happen to be less than the aver- 
age which, as we have just seen, is covered in the price and 



294 DISTRIBUTION OF WEALTH [220 

paid for by the consumers, a chance profit is gained by the 
producer; and whenever the actual losses exceed the average, 
a chance loss is suffered. While in individual cases either 
gains or losses may predominate, the general trend is to a 
balance. 

In the ordinary course of production and distribution the 
workers, the landlord and the capitalist receive their re- 
spective shares at the current rate of wages, rent and interest, 
and any gains or losses due to chance departures from the 
average fall to the one who holds the position of venturer 
(144). 

220. Insurance. — Some losses, like those from fire, hail or 
shipwreck, are of comparatively infrequent occurrence, but 
when such accidents do happen, the losses are usually heavy. 
For the purpose of equalizing these losses as nearly as pos- 
sible among all who are exposed to the same risk, various 
systems of insurance have been organized. The payment for 
the insurance, known as the "^ premium," is calculated to make 
good the average of all losses covered by the insurance and to 
pay for all service required in the maintenance of the system. 
The cost of insurance becomes an item of the cost of production 
and distribution, which through competition becomes a part 
of the price at which the products or services are marketed 
and is therefore paid by the consumers (149). 

It follows that whether the risk is insured or is not insured, 
the fact of its existence causes an increase of the market price 
of all products, in proportion as these products are affected. 

The lending of money is subject to a risk of loss due to the 
occasional failure of debtors. At a former point of our dis- 
cussion (139) we have seen that this risk is usually a subject 
of insurance, for the interest payable on loans contains an 
item in the nature of an insurance premium. By receiving 
this premium the lender assumes the position of insurer. 
This applies particularly to banking institutions generally. A 
bank is in fact an intermediary agent between its depositors 
and its borrowers, and the risk involved in the lending of the 
depositors' money is borne by the bank. The losses arising 
from the failure of some of the borrowers are made good out 



221] CHANCE PROFITS AND LOSSES 295 

of that portion of the interest paid by all borrowers which 
constitutes the insurance item. The borrowers as a class have 
to pay for the delinquencies of those among them who fail, 
the bank acting in the capacity of insurer (102, 263, 290). 

221. Economic Inertia. — The factors which determine 
prices in the industrial world are subject to never-ending 
changes. Both demand and supply are influenced by various 
causes. Demand is affected mainly by the inconstancy of hu- 
man desires, which often change for purely psychological 
reasons, as when new fashions supplant the old. The changes 
in the supply are principally due to advances in science and the 
arts, whereby the efficiency of labor is increased and the cost 
of production correspondingly reduced. 

By reason of these variations in both intensity of desires 
and cost of production it often happens that final utility and 
marginal cost of production become temporarily unequal. 
Prices are then regulated by final utility alone, and not by 
cost. And owing to what is known as "economic inertia," it 
takes more or less time for the market to become adjusted to 
the changes above indicated. The result of this inertia may 
be studied by diagram. 

Let the curves S8' and DD' of Fig. 23 represent respect- 
ively the sellers' and the buyers' price limits at a given 
moment. The market having adjusted itself to these condi- 
tions, the price will be equal to qa and the rate of production 
equal to Oq. Suppose now that through an invention the 
cost to the producers is reduced to the level of TT' and that a 
change of fashion has stimulated the demand to the level of 
EE'. Production being for the moment at the rate Oq, the 
final utility, and hence the current value, rises from qa to qh, 
while the marginal cost of production falls from qa to qc. The 
actual supply being Oq, the momentary sellers' price limit 
cannot extend beyond the point c, and the price of the com- 
modity rises to the intersection h of the sellers' price limit 
Teh with the buyers' price limit EE', The price becomes 
equal to qh, while the marginal cost is only equal to qc. The 
producers favored by this condition reap a chance profit, and 



296 DISTRIBUTION OF WEALTH [222 

this has the effect of attracting others to this occupation. Pro- 
duction becomes eventually increased to the rate of Oq', the 
point of intersection d becomes the new margin at which cost 
and utility come to a balance, and the price becomes adjusted 
to the ordinate q'd (232). 

In the course of events changes of the opposite nature also 
take place, so that producers are confronted either by a falling 
price or by increased costs, and those near the margin suffer 
actual loss. They are then forced into other pursuits and the 
consequent decrease in the volume of production finally leads 
to a new balance of marginal cost and final utility. 

In reviewing these changes of the market we may broadly 
distinguish three conditions. The current value of a thing, as 
determined by final utility, may be above, equal to, or below 
the marginal cost (63). In the first case production is un- 
usually profitable and becomes increased by accessions to the 
ranks of the producers. In the second case final utility and 
marginal cost are evenly balanced, and the relative volume of 
production remains stationary (60). In the third case pro- 
duction is unprofitable and is reduced by desertion of pro- 
ducers to other fields (148). The normal condition is that of 
the second case. In the first and the third case the current 
value differs from the normal value, but competition tends to 
a readjustment in which final utility and marginal cost are 
equalized. 

Profits and losses resulting from such conditions can arise 
only during a limited period, namely the period of readjust- 
ment, during which they continually tend to diminish and 
finally cease (149), only to reappear as new changes develop 
which affect the course of either or both the curves SS' and DD'. 

A period of readjustment may be shorter or longer, accord- 
ing to circumstances. There are several well defined causes 
that tend to prolong this period, which causes may be classed 
under the headings of economic inertia and economic 
momentum. 

222. Factors of Economic Inertia. — Workers accustomed 
to their occupation are naturally averse to making a change 
and will not do so unless the disadvantages under which they 



223] CHANCE PROFITS AND LOSSES 297 

labor, or the advantages offered by a change, overcome their 
reluctance. Readjustments may thereby be delayed, but they 
are certain to come about in the end. 

Protracted delays are apt to arise from the fact that in the 
production of many things a considerable interval of time 
elapses between the beginning of the work and its completion. 
Prices can, of course, be affected only after the products are 
offered in the market, and this may be months or even years 
after the first steps toward the increased production have 
been taken. Agriculture furnishes an obvious example. In 
other eases even the first steps toward the new adjustment 
may be more or less delayed, "When a new invention is 
brought out, it may often be less wasteful to continue the use 
of the old appliances, even at a disadvantage, than to ' ' scrap ' ' 
them. Those in use are then retained until practically worn 
out, when their replacement by improved appliances will no 
longer involve a loss. For this and other reasons of this nature 
the transferrence of capital from one channel to another is 
even more sluggish than the migration of labor. 

223. Economic Momentum. — When, for any reason, some 
line of business becomes unremunerative to those engaged in it, 
the marginal workers will be the first to turn to other occupa- 
tions, thereby lessening production in that line and gradually 
restoring the equilibrium between final utility and marginal 
cost of production (148). When, on the other hand, new con- 
ditions cause some one occupation to afford unusual profits, 
the first to be attracted are, in general, those workers who are 
near the margin in their respective trades and who can readily 
turn from that to the more remunerative field (44). A slight 
change in the price will, accordingly, induce only a limited 
number of workers to change their occupation, and the market 
will gradually adjust itself to the new conditions. 

Sometimes, however, the adjustments are overdone, only to 
be followed by reaction. It often happens that some innova- 
tion opens up an unusually promising field of enterprise for 
both capital and labor, with the result that more producers 
are attracted to this field than are warranted by the actual 
demand. This situation becomes particularly acute where 



298 DISTRIBUTION OF WEALTH [224 

the enterprise is of a kind which requires considerable time 
for preparation. Since an increase of the supply cannot 
make itself felt until after the finished products are offered 
in the market, the prospect of gain continues to be inviting, 
though the supply in preparation is already greater than 
the demand justifies. The natural result is a supply greater 
than the demand and a consequent more or less disastrous fall 
in the price of the product in question. 

As a pendulum is carried by its momentum from one ex- 
treme to the other, so may the market swing from an over- 
balance of demand to an over-balance of supply, and some who 
are furnishing the supply, instead of reaping profits, suffer 
loss. 

224. The Law of Chance Profits. — Among the profits so 
far considered, those of chance are the only ones that are not 
in the nature of recompense for some form of service. All 
other forms of income, nainely wages, rent, capital returns and 
interest on money, are determined by specific economic forces, 
by reason of which they approximate a definite rate. Though 
the causes which determine the division of net incomes into 
wages and capital profits are yet to be examined in our further 
investigation, we know at least from experience that wages and 
capital profits have the tendency to reach a certain relative 
rate, however this rate may differ with time and place. But, 
as regards chance profits, theory as well as experience in- 
dicates that their tendency is always toward a balance with 
chance losses (138, 216). 

It has been stated before that chance profits accruing to a 
productive group go to the venturer (144). It is however 
often difficult to decide whether certain items of the income 
of a group are due to chance or to efficient management. The 
impossibility of deciding whether, in any given case, a certain 
item should be classed as wages of the manager or as profits of 
the venturer cannot gainsay our conclusion that chance profits 
invariably tend to balance chance losses. 



PART III 

RESTRAINTS ON INDUSTRY 



CHAPTER XIII 
MONOPOLY 

225. Economic Impediments. — Of the economic factors 
which affect the distribution of the fruits of industry among 
those who participate in production, one class has so far been 
left out of account. To make our investigation complete, we 
shall now take up that remaining class. This brings us to the 
consideration of customs and of laws, in so far as they pro- 
mote or retard the working of purely economic forces. 

Our past conclusions were based in general on the assump- 
tion of a freedom of competition. But such freedom has never 
existed and does not now exist (150). The free play of 
economic forces is hampered by social conventions of all 
kinds, which remain with us as inherited from the ignorance, 
the prejudices and the superstitions of bygone times. Out of 
these grew various systems of caste, the traces of which are 
yet clearly apparent in society. We have indeed outlived the 
most barbarous forms of these systems, such as slavery and 
serfdom, but many of the economic conditions growing out 
of the social organization of the feudal ages continue prevalent 
to-day in the form of laws designed to regulate industry, com- 
merce and exchange, as well as laws creating monopolies 
through special privileges and franchises. 

In current discussions the term ''monopoly" has come to 
be used with so much looseness that we must here explain and 
define the sense in which it should properly be understood. 

Literally the word ''monopoly" signifies a sole right or 
sole power to sell. By most writers on economics the term is 
held to include all forms of economic right or power of an 
exclusive nature. Popularly the term is however often applied 
to the more or less complete control of production and ex- 
change acquired by various industrial and commercial con- 
cerns in their respective fields, a control usually attributed to 
their manipulation of the market; but such use of the term 
can only lead to confusion and should therefore be avoided. 

301 



302 RESTRAINTS ON INDUSTRY [22&-228 

226. Monopoly Implies Restraint. — A monopoly is to be 
regarded as an exclusive economic right, the essence of which 
is really a special exemption from a general restraint. It is 
this restraint which is the positive element of monopoly (18). 
The power of restraint is generally exercised by the organized 
community through forms of law, but individuals or organized 
groups often seek to put it into effect with the object of 
acquiring a monopoly for themselves. 

There are two distinct forms of monopoly, which may be 
designated as ' ' personal ' ' and ' ' impersonal. ' ' The distinction 
lies in that the one depends on a restraint imposed by a con- 
trolling power upon all but a limited number of specified per- 
sons, while the other depends on a limitation placed on the 
production or use of certain things. 

227. Ethics of Monopolies. — There is a generally prevail- 
ing idea that monopoly is, in its very nature, an injustice to 
the community at large. But this is by no means always the 
ease. There are several forms of exclusive right which are 
fundamentally just and which, for this reason, are proper 
subjects of legal protection. Of this class patent and copy 
rights are notable examples. Monopoly in itself can do no 
harm ; it is only when it is inequitable in its relation to the 
community that it becomes detrimental. 

Equity is satisfied whenever an exclusive right is granted 
in return for the performance of an equivalent duty, or, to 
put it in other words, whenever that which the community 
receives for the grant is an equivalent of that which it gives. 

Government is supposed to bestow impartially protection 
and rights and to impose the corresponding duties on all 
members of the community. But the fact is that governments 
have often granted, and still continue to grant to individuals 
or to groups rights and privileges which are distinctly 
disadvantageous to the community. It is impossible under 
this policy to avoid the development of class distinctions and 
antagonisms. 

228. Ownership a Form of Monopoly. — The most impor- 
tant of all exclusive rights is that of private ownership. This 
is not usually regarded as a monopoly, but since it possesses 



229] MONOPOLY 303 

all the elements of monopoly, it cannot logically be excluded 
from that category of rights. The owner of a thing is the 
only one who may rightfully use it or dispose of it, and the 
community restrains all its other members from interfering 
with that right. 

The nature of this right, its justice and equity, have 
already been amply discussed (20, 21). 

229. Patent and Copy Rights. — ^Patent and copy rights 
differ in one essential respect from the right of ownership in 
things. They are not exclusive rights of possession of specific 
things, but exclusive rights of producing and vending a speci- 
fied hind of things. 

Patents are granted to individuals who invent new means 
or discover new processes of production. They are enforced 
by the legal restraint placed upon the rest of the community 
against the production and sale of the thing patented. A 
patent is really a compact between the inventor and the com- 
munity. The inventor gives to the community a full de- 
scription of his invention, and in return the community 
pledges itself to protect the inventor for a certain number of 
years in the exclusive control of the invention. The grant of 
a patent is, accordingly, in the nature of a recompense for a 
service rendered. 

The objections that have been urged from time to time 
against patent laws are, as a rule, due to a widespread, though 
unfounded, antagonism to monopolies generally. A patent 
being, as already said, merely the giving of one service in 
exchange for another, the granting of patents is fully justified. 
And, moreover, the monopoly of inventions granted by the 
community is not only a recompense due to the inventor, but 
is a potent stimulus to industrial progress and thus a benefit 
to the community. Inventions generally require the ex- 
penditure of much labor, and frequently of labor of an ex- 
ceptional quality, which should be rewarded; and the most 
practical as well as the most rational method of conferring 
this reward is to give the inventor the exclusive right, for a 
limited period, to exploit the invention for his individual 
benefit. 

The time limit of a patent monopoly is an important factor 



304 RESTRAINTS ON INDUSTRY [230, 231 

in that exclusive right. The only matter that may be open to 
question is that of the duration of the patent. This, however, 
is only a question of expediency. If the time is too short, the 
inducement to invention is inadequate and progress will lan- 
guish. If it is too long, the public loses by undue postpone- 
ment of the time when the production of the thing invented 
becomes open to competition. 

Copyrights on productions of art and literature are given 
for the same reasons as those for which patent rights are 
granted, the work of artists, authors and composers being 
essentially of a nature similar to invention. 

The monopoly in trade marks is designed to protect those 
whose products have gained a valuable reputation. Through 
monopoly in the use of a name or a mark distinguishing his 
goods in the market, the owner of a trade mark is enabled to 
reap the benefit which he has earned. The propriety of grant- 
ing such monopolies is self-evident. 

230. Land Ownership. — The right of land ownership is in 
some respects essentially different from the right of owner- 
ship in the products of labor. That the producer of a thing, 
however it may be produced, should be the owner until he dis- 
poses of it is obvious ; but such is not the case with regard to 
land, since land is an elementary part of nature and is not the 
product of labor. 

It goes without saying that the cultivator of land should 
be protected in the ownership of the fruit of his labor. For 
this reason the initial ownership of land was, and in all new 
countries generally is, accorded to the first settlers. In the 
course of time, however, as population increases, the economic 
relation between land owners and the community becomes 
more and more complex. The resulting conditions will come 
up for consideration in connection with the land question, to be 
treated in a subsequent chapter (323-333). 

231. Franchises Depending on the Use of Land. — Some 
enterprises are of such a nature that they depend for their 
economic existence on the exclusive use of public land for 
specific purposes. It is impracticable, for example, to give 
permission to everybody indiscriminately to lay water or gas 
mains under the streets of a city. The convenience and com- 



232] MONOPOLY 305 

fort of having water and gas in our homes is therefore de- 
pendent on what is, in its very nature, a monopoly, whether 
exercised by individuals or by the municipality or the state. 
Another case of the same description is that of monopoly 
rights to operate street ears for carrying passengers. Steam 
roads are monopolies in the measure in which the construction 
of competing roads depends on charters from the government 
which may be, and for obvious reasons in many cases should 
be, withheld. 

Franchises of this description, being dependent on the ex- 
clusive use of land for their special purpose, are closely 
related to the right of ownership in land. Their final con- 
sideration must therefore follow the discussion of the land 
question (334). 

232. Impersonal Monopolies. — ^What we have denominated 
as * * impersonal ' ' monopoly can be brought about through im- 
pediments arbitrarily imposed on production, whereby the 
amount produced is limited (238, 261). For example, circum- 
stances may arise under which the demand for certain things 
exceeds the capacity of existing means for producing them, 
particularly if their production requires special appliances. 
For the time being, the price of these things is above the 
marginal cost of production, and profits obtained from this 
source are of the nature of chance profits which, as we have 
seen (221), tend to fall away if competition is free. But if 
competition is forcibly obstructed, high prices will continue, 
and the profits in such case must be classed as monopoly profits. 

As a rule, an impersonal monopoly can be maintained only 
so long and so far as the obstruction to competition is effective. 
Any obstruction of this nature contrived by individuals for 
selfish ends may be successfully maintained for a time, but 
ultimately competition gains the upper hand. Only if com- 
petition is restrained by law or by some other controlling 
influence can a monopoly of any kind continue to exist 
indefinitely. 

The workings of impersonal monopolies can be studied by 
contrasting them with monopolies of the personal type, and 
this may be done by reference to the example which was illus- 
trated by the diagram Fig. 23. In this example we assumed 
20 



306 RESTRAINTS ON INDUSTRY [232 

that SS' and DD' are the initial supply and demand curves of 
a given commodity and that through some change of conditions 
the curves TT' and EE' subsequently took the place of the 
initial curves. The capacity of production having before the 
change been adapted to an actual supply equal to Oq, the 
final utility, after the change, was found to rise from qa to qb, 
while the marginal cost of production fell from qa to qc. The 
resulting profit ch accruing to the marginal producers was 
recognized as an incentive to that immigration from other 
channels of production through which ultimately the equi- 
librium was restored. In this process of readjustment the 
amount produced was found to increase from Oq to Oq' and 
the market value to fall from qT) to q'd. 

But let us assume that in this industry an increase of pro- 
duction is deliberately prevented and the actual supply kept 
at Oq. The market value, as determined by final utility, will 
then remain at the rate qh, and the gain c& of those engaged 
in that line will continue. In this way those profits which we 
have found in the natural order of things to be due to chance 
and subject to elimination through the effect of competition, 
are removed from that influence and become what are really 
monopoly profits. 

Our study of the difference between personal and imper- 
sonal monopoly can now be completed. Let us, for illustra- 
tion, compare the case where a given article is patented with 
that where the supply of the same article is artificially held 
down. In the first case the possessor of the exclusive right to 
produce and sell will put an arbitrary price, say Op', on the 
article, and the conditions of demand being represented by 
the curve EE', he will be able to sell, at this price, a quantity 
equal to Oq. In the second case we may assume that pro- 
duction is deliberately limited, so that the actual supply equals 
Oq, when the final utility, and with it the price, will become 
equal to qh. In the one case price determines quantity de- 
manded, in the other quantity supplied determines price. 

The effect on the market is the same, whether the price is 
determined under the protection of a patent or through de- 
liberate limitation of the supply. In either case the price to 



233. 234] MONOPOLY 307 

the consumer is maintained above a competitive level only 
through prevention of competition. 

233. " Cornering" the Market. — ^A ** cornered" market is 
properly to be regarded as an example of a monopoly of the 
impersonal type, since it is brought about by an obstruction 
of the regular channels of supply. Such attempts at monopoly, 
however, meet with failure far more frequently than is gen- 
erally supposed. Only under exceptional circumstances can 
such interference with the normal course of supply accomplish 
its purpose. Successful attempts of this kind are practically 
rare, but when they do occur, they naturally attract a large 
measure of public attention, while, on the other hand, the 
failure of only the most widespread attempts of this class is 
brought to public notice. Efforts to corner the market can- 
not, therefore, have any more than a passing effect on economic 
conditions. 

In so far as labor unions succeed in obstructing competi- 
tion, the conditions they bring about are akin to monopoly. 
But monopolies of this nature cannot be discussed intelligently 
until after the cause of the frequent contentions between labor 
and capital has been more fully discussed (268-276, 354-358). 

234. Monopoly Incomes. — The essence of monopoly being 
the forcible suppression of competition, the holder of a 
monopoly is enabled to obtain higher prices than would rule 
in a competitive market. In granting public utility franchises 
it is not unusual to place some restriction on the price to be 
charged for services rendered, but even where such stipulation 
is absent, there is a limit to what the holder of a monopoly 
can get. 

Let us take the case of a patented article. The patentee 
may over-estimate the value of his invention and set a price 
on his goods which no one is willing to pay. He will then not 
only miss his opportunity, but will also deprive the com- 
munity of any benefits which might be derived from the 
invention. Nor could the inventor derive any monopoly profit 
by selling the article at cost, that is, at a price which would 
obtain in the market, were the article not patented. In order 



308 RESTRAINTS ON INDUSTRY [234 

to realize such a profit, he must therefore offer his products at 
a price somewhere between these limits, and there is a point 
at which his income will be greatest under the existing con- 
ditions (262). We may again have recourse to a graphical 
method for making this matter clear. 

Suppose that the curve DD' of Fig. 24 represents the ae- 
mand that exists for the patented article in question, while 
the ordinate of the horizontal line CC represents the cost per 
unit of making and selling it.®^ If the inventor were to sell 
the article at the price Op', he could sell no more than the 
quantity Oq'. The cost of making this quantity equals the 
quantity multiplied by the cost of each unit and is therefore 
represented by the area Op'c'C, while the gross receipts from 
the sale would amount to quantity times price, represented by 
the area Oq'a'p'. Hence the monopoly profits would be the 
area Cc'a'p'y namely the difference between cost and receipts. 
Had the patentee made his price equal to Op" , his profits 
would have equalled the area Cc"a"p". In both cases the in- 
come from the monopoly would be comparatively small. There 
is obviously a point in the range of prices at which the profits 
are at a maximum, and it can be shown that this is the point 
a where the angle x included between the line Ca and the 
horizontal line pa equals the angle y which is included between 
the same horizontal line pa and the tangent to the curve DD' 
at the point a. Under these conditions the area Ccap measur- 
ing the monopoly profits is a maximum. 

If it were possible in any specific case to trace the actual 
curve of demand, or of the buyers' price limit DD', this would 
be a convenient method for enabling the patentee to find the 
most advantageous price at which to sell the patented article. 
But since this cannot be done, the patentee must depend upon 
his judgment and experience in fixing his price. 

The same reasoning is of course applicable to all forms of 
monopoly, their economic relation to the general market being 
essentially alike. 

"When monopolies are the source of continuous incomes 

"In view of the fact that the cost of producing equal quantities is 
usually less as the quantity produced at a tjme becomes greater, the 
line CC should in most cases really be a descending curve. 



235] MONOPOLY 309 

throughout the duration of their existence, they are, in several 
respects, analogous to capital goods. A franchise possessed by 
a stock company figures as one of its assets and gives a value 
to the stock over and above the value of the actual property 
of the concern, 

235. The Power of Monopoly. — Judging from the various 
suggestions that are made from time to time for ' ' curbing the 
power of predatory wealth, ' ' the prevailing idea of the power 
that can be wielded through monopoly is very much confused. 
The idea is no less hazy and undefined than is the popu- 
lar notion as to what constitutes a monopoly. The power 
of the so-called trusts and other large corporations is often 
attributed to a monopolization of their field, while in reality 
it is due to an extraordinary and peculiar influence of wealth, 
the nature of which will be analyzed in its proper place (241- 
243, 257-266). We should therefore endeavor to get a correct 
insight into the extent to which the power of monopoly can be 
carried, and the effect of this power. 

With the data thus far presented we can adequately gauge 
the sacrifice which the community makes in granting monopoly 
rights, and the power which is thereby placed in the hands of 
the holder of the monopoly. 

The loss which the community really sustains depends en- 
tirely on the way in which the monopoly is exploited. The 
case of a patented invention may again serve as an illustration. 
Should the inventor sell the article at the competitive price OC, 
Fig. 24, the community would obtain all the benefit as though 
the production of the article were not restricted at all. This 
benefit is represented by the area CAD. If, on the other hand, 
the article is offered at a price equal to or exceeding OD, so 
that no sales will be made, the community will for the time be 
deprived of any good which they might otherwise reap from 
-the invention. At a somewhat lower price the invention is 
placed within the reach of a limited number of users. For 
example, if the sales are made at the rate of Op, the quantity 
sold will be Oq, and the excess of the desire for the goods sold 
over the price paid is represented by the area paD. 

When we compare these three cases and note the several 
effects on the community, we find that in the case where a 



310 RESTRAINTS ON INDUSTRY [235 

prohibitive price is asked, the comnmnity loses all the benefit 
of the right it relinquishes, and this is the greatest privation 
that can possibly be incurred through the grant of the ex- 
clusive right. In no case can the grant of a monopoly deprive 
a community of more than the benefits it would derive from 
its own exercise of the right in question (262). 

In confirmation of this statement illustrations could be 
cited by the hundreds, but one may suffice to show the prin- 
ciple. The company which owns the Suez Canal holds a 
monopoly because this artificial channel of commerce is the 
only waterway directly connecting the Mediterranean and the 
Red Sea. Nevertheless the owners cannot exact a toll higher 
than the cost of navigation around the Cape of Good Hope, 
and were they to demand so high a charge the commerce of the 
world would be placed on the same basis as if the canal had not 
been dug. 

To be sure, the power of monopoly is not ordinarily pushed 
to a prohibitive extreme, for the simple reason that at this 
point no advantage can be gained by the holder. By demand- 
ing a reasonable recompense, the owner of a monopoly right 
shares the benefit of the monopolized object with the com- 
munity. Thus, if a patentee charges a price for the patented 
product corresponding to Op, Fig. 24, he obtains a net or 
monopoly income corresponding with the area Ccap, while the 
purchasers enjoy a benefit represented by the area paD. 

However obvious this principle is, there are many facts 
which seem to be at variance with it. We hear of a tobacco, 
of a sugar, of a meat trust, and these are charged not only 
with exacting a tribute from all the users of their products, 
but also with crushing their competitors. Yet the community 
has granted to them no exclusive right to carry on their busi- 
ness; no specific restraint is placed on anyone to prevent him 
from entering into competition with them. These combina- 
tions evidently wield a power which cannot be explained by 
any grant of exclusive right in their favor. We are thus con- 
fronted with facts which appear to be irreconcilable with our 
theory, and unless this discrepancy can be cleared up, the 
theory cannot be verified. 



CHAPTER XIV 

THE MONOPOLY THEORY OF INTEREST 

236. Usury Laws. — Until less than four hundred years 
ago "usury," which was then the synonym of our word ''in- 
terest," was regarded as morally wrong and was universally 
condemned as unjust and oppressive. Aristotle describes it as 
unnatural, the Mosaic law forbids it and in this respect the 
early Christians accepted the Mosaic teachings. In the Middle 
Ages the doctrines of the church were enacted into law, and 
usury was forbidden under various penalties. Even now, the 
taking of interest beyond a specified rate is interdicted in 
many states of the Union as well as in several European 
countries. Such laws are, however, not only ineffective, being 
often evaded by various subterfuges, but are also unreasonable. 
It is useless to repress by force that which is a natural outcome 
of existing economic conditions. Interest is either justifiable, 
or it is not so. If interest is due to the working of natural 
economic forces, if it is an inevitable sequence of free com- 
petition, then all laws which attempt to regulate the rate of 
interest are invasive and therefore unjust. On the other 
hand, if interest arises through an arbitrary interference with 
the working of natural economic forces, if it is a sequence of 
some distortion of the industrial and commercial order of 
things, the only remedy is obviously the removal of the dis- 
turbing infl[uence. The cause, and not the result should be 
combated. In either case it is as futile as it is irrational to 
limit the rate of interest by legal proscription. 

237. Distinction Between Usury and Interest. — The first 
effective assault on laws forbidding interest was made by John 
Calvin during the period of the Reformation. As we have had 
occasion to point out before (190, 204), he attributed the in- 
terest paid for the loan of money to the income derived from 
houses or fields bought with the money. While this reasoning 
does not really bring to light the cause of the interest com- 

311 



312 RESTRAINTS ON INDUSTRY [238 

manding power of money, it paved the way to that revision of 
the law through which the taking of interest, at least within 
certain limits, was sanctioned. A distinction was thereby 
established between "usury" and "interest," the former term 
being confined to an excessive or extortionate rate, 

Calvin's explanation of the interest commanding power of 
money is even to-day accepted almost without challenge. We 
have, however, found ample evidence that this explanation is 
essentially unsound, and that the interest paid on money is 
really paid for the use of money as an instrument of exchange, 
and not for the use of the things that are bought with it (209- 
211). We should, accordingly, seek to discover what it is that 
gives to money its singular power. 

238. Money Subject to an Impersonal Monopoly. — The 
part which money plays in making the specialization of in- 
dustry possible has already been discussed (211-213). We 
have also found reason to infer that the interest bearing 
power of money is related to the final efficiency of money, and 
since final efficiency can be conceived only with reference to a 
definitely limited quantity, we should now acquaint ourselves 
with the conditions that place a limit on the volume of money. 

Let us make a comparison between that which limits the 
supply of money with that which limits the supply of any 
commodity. It has been shown (43) that in general the supply 
of commodities is limited by natural conditions, largely by the 
innate reluctance of producers to exert themselves beyond a 
certain point. The production of any given commodity is con- 
tinued only so long as the expected utility and consequent 
gratification is considered worth the effort. For this reason 
final utility, and with it the price, always tends to adapt itself 
to marginal cost (62-64), Does this principle also apply to 
money ? 

In speaking of effort or cost of producing money, we can 
here mean only the cost of converting into money either the 
substance gold through the process of coinage, or the substance 
of credit through the process of banking. The cost of pro- 
ducing the substance of which the money is constituted is not 



238] MONOPOLY THEORY OF INTEREST 313 

here in question, for this has bearing on the exchange value, 
the purchasing power, of money, and not on its interest- 
bearing power. That this interest-bearing power is related to 
the final efficiency of money, and that this final efficiency 
equals the benefit afforded by the last instalment of its volume 
has already been shown (213). In order to understand why 
it is that notwithstanding the high final efficiency of money 
further instalments are not forthcoming, in other words, what 
it is that puts a limit on the volume of money, each kind of 
money will be taken up in turn. 

Beginning with gold coin, we find that the production of 
such currency is not legally limited. All gold brought in 
proper quantity to the mint is coined. The cost of doing this 
work is borne by the government, hence the question of cost 
cannot enter as a deterrent factor. But while there are neither 
legal restrictions nor economic drawbacks in the form of cost, 
the amount of gold brought to the mint is wholly insufficient 
to provide an adequate volume of currency. The volume of 
gold coin is manifestly limited hy natural conditions. This is 
true even though the amount of gold produced and utilized for 
money is steadily increasing. 

The second form of our currency, consisting of legal tender 
credit tokens, including silver dollars and subsidiary coin, is 
strictly limited hy law. In this case law does that which, in 
the first case, is done by the natural scarcity of the metal gold. 
Also in this case there is no item of cost, since the cost of 
issuing that currency is borne by the government. 

Under existing law national bank notes are ordinarily 
issued only against federal bonds deposited as security in the 
national treasury. This places a limit on their use, for only a 
certain, though possibly variable, amount of such bonds is in 
existence. Moreover, the issue of these notes is taxed, which 
has the effect of a cost that tends to restrain the issue of such 
notes. 

The issue of emergency national bank notes, based on se- 
curity other than bonds, is indeed permitted to a limited 
extent, but only under the burden of a gradually increasing 
tax. This latter provision is specially designed to prevent the 



314 RESTRAINTS ON INDUSTRY 

issue of these notes, except in the event of such scarcity of the 
circulating medium as will drive the rate of interest on money 
far above the usual rate. 

Finally, the issue of notes by state banks is subject to a 
federal tax of ten per cent, per annum and is thereby prac- 
tically forbidden. 

From this it is apparent that the volume of our currency is 
arbitrarily limited by law. But our currency is not our only 
medium of exchange. The banking system enables business 
credits in the form of bank checks to serve this office (104a). 
It is often claimed that the check system permits an indefinite 
expansion of exchange facilities, enabling the total volume to 
adapt itself to the needs of commerce. But we have seen 
(1046) that, by provision of banking laws, the volume of 
bank credits cannot exceed more than about eight times ®^ the 
amount of legal money held as reserve in the banks, and since 
this reserve can, in the nature of things, be only a fraction of 
the total volume of legal currency, indeed, according to sta- 
tistics, only about one-third of it, we find that the limitation 
of legal currency results in holding down the volume of bank 
credit within a limit which, though not sharply defined, is 
nevertheless positive. 

This limit may vary from several causes. First, the total 
volume of currency in the country, applicable for bank reserve, 
is variable, principally by reason of the variable amount of 
gold in the country. Second, the ratio of the currency held in 
bank reserves to the total volume of the currency is variable, 
depending largely on the changing phases of business activity. 
This causes a fluctuation in the volume of bank credit, even 
while the volume of currency remains unchanged. 

It is held by some that the field of exchange facilities is 
further broadened by the use of promissory notes given in pay- 
ment of accounts. But this is not so, since promissory notes 
do not take the place of money in the sense in which bank 
credit does. They are not adapted for general circulation and 

"This ratio may be affected by cbanges in our currency laws or 
banking practice. 



239] MONOPOLY THEORY OF INTEREST 315 

cannot, for this reason, facilitate exchanges to any great ex- 
tent. As an addition to the volume of the medium of exchange 
they are a negligible quantity. 

These considerations plainly show that while the volume 
of gold money is limited by natural conditions, the volume of 
credit money is limited by certain legal enactments, through 
which the issue of currency is specifically restricted, on the 
assumption that such limitation is necessary for the protection 
of the note holders (264, 270). 

We have here the fundamental difference between the 
supply of commodities and that of money. While the pro- 
duction of those commodities that are not monopolized in any 
way is regulated by purely economic forces, by conditions 
which naturally arise under the influence of free competition, 
the production of money is circumscribed by legal enactments. 
By this arbitrary regulation there is created an impersonal 
monopoly (232), the effect of which we shall presently analyze. 
While, in the ease of commodities, the production of which is 
open to free competition, final utility and marginal cost are 
normally equal, there is no corresponding equality between the 
final efficiency of money and the marginal effort or cost of 
converting gold or credit into money. 

239. The Supposed Danger of " Inflation." — The legal re- 
striction of the amount of currency is prompted by the fear of 
grave consequences supposed to follow enlarged issues of cur- 
rency (320a). The supposed effects of this so-called "in- 
flation" are described by John Stuart Mill as follows (285, 308, 
320&) : 

There is no way in which a general and permanent rise of prices, 
or, in other words, depreciation of money, can benefit anybody, except 
at the expense of somebody else. The substitution of paper for metallic 
currency is a national gain; any further increase of paper beyond this 
is but a form of robbery. 

An increase of notes is a manifest gain to the issuers, who, until 
the notes are returned for payment, obtain the use of them as if they 
were a real capital: and so long as the notes are no permanent addition 
to the currency, but merely supersede gold or silver to the same amount, 
the gain of the issuer is a loss to no one; it is obtained by saving to 
the community the expense of the more costly material. But if there 



316 RESTRAINTS ON INDUSTRY [239 

is no gold or silver to be superseded — if the notes are added to the 
currency, instead of being substituted for the metallic part of it — all 
holders of the currency lose, by the depreciation of its value, the exact 
equivalent of what the issuer gains. A tax is virtually levied on them 
for his benefit.*^ 

This argument is founded on the theory that an increase 
of the volume of currency, other conditions remaining un- 
changed, is attended by a depreciation of the currency already 
existing (115-125). According to this theory the additional 
currency notes obtain their value by robbing the previously 
issued notes of a portion of theirs. 

Such is really the case when a note issue is increased with- 
out making provision for the redemption of the added notes, 
for in such case depreciation does inevitably ensue (124). The 
charge of robbery against the issuer is then justified, not, how- 
ever, because of an increase of the issue, but because of the ab- 
sence of provision for redeeming the notes. Depreciation will 
not follow when the added currency is adequately secured by 
existing wealth, and is redeemable in the commodity constitut- 
ing the value unit. Mill and his fellow disciples of the earlier 
school erred in assuming that the value of currency notes is 
subject to an economic law different from that which controls 
the value of all other credit instruments. They failed to 
realize that the value of currency notes is really derived 
from the wealth which is pledged for their redemption 
and that it is measured by their face value stated in terms of 
the metal in which they are redeemable. Why, then, expect 
them to depreciate ? Indeed, the value of notes which are ade- 
quately secured and redeemable in gold can change only if the 
value of the metal changes; and since an increase of fully 
secured notes redeemable in the standard metal is likely to be 
attended by an increase of the demand for the redemption 
medium, the value of the metal will rise rather than fall in 
consequence (121, 320c). The fear of depreciation is ground- 
less, and to denounce an increase of currency as "inflation" 
and "robbery" is wholly unwarranted. 

«^ Mill, II, p. 99. 



240] MONOPOLY THEORY OF INTEREST 317 

As above stated, the danger of depreciation exists only 
when redemption is jeopardized. But Mill and his school warn 
against any increase of currency beyond the volume already 
in existence, however completely redemption may be guaran- 
teed. What reason is there for thinking that the volume now 
in use is the proper amount ? Who can point out when money 
has attained the limit of its usefulness? The very fact that 
periods of financial stringency do occur proves that the value 
of the dollar does not adapt itself to the demand for money 
(125), and to advocate emergency issues for meeting tem- 
porary money stringencies is to admit the fallacy of the 
volume theory. No law has ever been proposed to prevent 
an inflation of looms, or of locomotives, or of other tools of 
production and transportation, lest the value of the looms 
and the locomotives already in use should thereby suffer. In 
the production of commodities we have learned to let free 
competition have its way. Why should the most important 
tool of trade, the medium of exchange, be treated as an ex- 
ception ? There is certainly no more danger in increasing the 
facilities of exchange than there is in increasing the facilities 
of production. On the contrary, every impediment to ex- 
change is at the same time an impediment to production. 

240. Interest on Money Due to Competition for Money. 
— If we had no money at all, a specialization of the processes 
of production would be impossible, since specialization re- 
quires that the goods, while being advanced toward maturity, 
be transferred from group to group and subjected to repeated 
rearrangement. This fully explains the existing demand for 
money. 

It follows that if the total demand for money is not sup- 
plied, competition will tend to put a premium on its use (242, 
348). Interest is accordingly paid on money because of its 
inadequacy to meet the demand of those who need it for the 
exchange of their products or services, and, as we shall see 
later (256), this competition raises the rate of interest as high 
as the market will bear, indeed, so high as to exert a destructive 
effect upon the market (276). 



818 RESTRAINTS ON INDUSTRY [240 

It is of course only the borrowers' demand for money while 
the money in circulation is inadequate to cover the require- 
ments of business that can account for interest, and this 
demand arises generally from the exigencies of business, such 
as the employment of labor, or the purchase of material on 
credit. Thus money is usually borrowed to pay debts so in- 
curred or to be incurred. As we here deal with the question 
of pure interest apart from the wage and insurance items of 
gross interest, we must here assume that risk is absent, in other 
words, that the borrowers have adequate credit which they 
pledge for the loans. 

But why, it may be asked, should it be held that the demand 
for money accounts for the interest commanding power of 
money, and not for its purchasing power, as is supposed by 
economists generally ? 

Because, in the first place, owners of money would have no 
inducement to loan it to borrowers if the borrowers' demand 
for it would result only in maintaining its purchasing power. 
In the absence of interest the lending of money would bring 
no recompense to the lender, for there is no reason to assume 
that money, when the loan is returned, would as a rule have a 
greater purchasing power than when the loan was advanced. 

In the second place, money is not in itself a specific com- 
modity, but consists of credit, the amount of which is ex- 
pressed in terms of the adopted standard commodity (115). 
Its substance is therefore the wealth which constitutes the 
security of the credit, and its value is measured by the amount- 
and value of the commodity in which it is redeemable. Only 
when that redemption is not provided for, is the money sub- 
ject to depreciation from its nominal value. An excessive de- 
mand for a medium of exchange can affect the purchasing 
power of money only in the measure in which that demand 
reacts upon the value of the standard commodity, and this 
reaction has been analyzed heretofore (107-108). Demand, 
therefore, does not affect the purchasing power of money in 
the manner in which it affects the market value of commodities. 

How an insufficient supply of the medium of exchange 
gives it the power to command interest will next be considered. 



241, 242] MONOPOLY THEORY OF INTEREST 319 

241. Cause of the Inadequacy of Capital. — In dealing 
with the subject of money interest it was shown (210) that 
the borrower of money pays interest for the use of the money 
and not for the use of the capital goods bought with it, even 
though money is always idle capital incapable of yielding a 
revenue to its holder (133-134). Borrowers of money pay 
interest rather than go without it by reason of the faculty ex- 
clusively possessed by money, the faculty of making possible 
that aggregation of capital goods which is indispensable in the 
process of production (211a). But even then we had to fall 
back on experience for the fact that capital employed in produc- 
tion returns a revenue (211&), and an adequate explanation 
of this fact is yet wanting. 

We have already observed how goods in course of pro- 
duction pass from group to group. When the appropriate 
material is acquired by a group, this material is live capital 
until, in the process of production, it is advanced toward 
maturity. Thereupon, as far as that group is concerned, it 
becomes a finished product, or idle capital, which can become 
live capital, either as raw material or as means of production, 
of the next group only through the process of exchange. The 
goods thus become alternately active and idle capital. It is 
through production that capital goods are advanced from the 
active to the idle state, and through exchange that they are 
turned from an idle to an active state. From this it is at once 
apparent that with the process of production going on, and 
with the process of exchange held back through the arbitrary 
limitation of the means of exchange, the conversion of capital 
from the active to the idle state takes place more freely than 
the conversion from the idle to the active state. Consequently, 
the quantity of idle capital, in the form of goods awaiting ex- 
change, tends to increase, while the quantity of active capital 
tends to diminish (266). In this lies the reason for the ehhing 
of capital in actual employment, and, at the same time, for 
that flood of things in the marhet known as "overproduction." 

242. Key to the Theory of Capital Interest. — We have 
heretofore had occasion to advert to the relation which exists 
between the faculty of employed capital to "earn" a profit, 



320 RESTRAINTS ON INDUSTRY (242 

and the limitation of capital in actual use (162&), but could 
not at that point trace the cause which determines the amount 
of employed capital, nor the reason for the experienced fact 
that capital is not put to use to the extent which would enable 
labor to be employed at its maximum efficiency. Later we 
found that the interest commanding power of capital has been 
almost universally attributed to a scarcity of capital, or to 
some psychological factor that could readily account for the 
undersupply. We found that Ricardo simply took this scarcity 
as a matter of fact (195) and argued on that basis; Senior 
assumed that men are naturally averse to defer the con- 
sumption of what they have produced, and introduced the term 
"abstinence" to designate self-imposed delay of consumption 
(196) ; while Bohm-Bawerk presents the same idea in the 
form of an hypothetical underestimation of future -pleasure 
and pain as compared with the present (197). The disin- 
clination to "abstain" or "wait," as well as the assumed 
underestimation of future values would take the form of an 
unwillingness to produce capital, the benefit of which can be 
enjoyed only in the future, unless that future benefit is greater 
than can be obtained through the same amount of effort in the 
present; and this unwillingness to produce things which will 
bring benefit only in the future would in turn account for 
that comparative dearth of capital by which capital interest 
is explained. But we have found (200) that in the economic 
world the final utility, and hence the value of this waiting, is 
nil, and that accordingly these psychological factors cannot 
be made to account for the faculty of capital to yield returns. 
However, these theories may now be definitely set aside. 
Our inquiry has brought us to a point where the scarcity of 
capital can be explained by causes of a positive and objective 
instead of a negative and subjective nature (347) . The under- 
supply of money required for the purpose of mediating the 
transfer of capital goods from group to group fully accounts 
for the scarcity of active capital, and at the same time explains 
why there is a superabundance of idle capital, or unsold goods, 
generally attributed to "overproduction," a condition which 
is in irreconcilable conflict with every one of the above cited 



242] MONOPOLY THEORY OF INTEREST 321 

theories. That the power of active capital to return an in- 
come is due to a scarcity of such capital is quite true, but the 
reason for this shortage has not been correctly diagnosed by 
any of the generally accepted authorities on the subject. We 
have found that the formation of active capital is impeded by 
needless legal restriction, not by psychological restraints, such 
as a disinclination to produce or save capital, or an aversion 
to produce for future use, that can be overcome only by an 
accretion to the value of the future product. These needless 
restrictions imposed by law impede the free interchange by 
which idle capital is made active. This fully accounts for that 
undersupply of active capital which imparts to it an * ' earning 
power" approximating its final efficiency (162a), a power 
which it does not of itself possess. 

We can here go one step further in our conclusions. Since 
idle capital can be made active only through the use of money, 
the last increment of active capital is made active through the 
last increment of the supply of money. Hence the efficiency 
of the last increment of active capital, in other words, the 
final efficiency of capital, is equal to the efficiency of the last 
increment of the supply of money, in other words, to the final 
efficiency of money. It would follow from this that the rate of 
interest on money should determine the rate of capital returns. 

This completely reverses the usual explanation, according 
to which interest is paid for money because capital goods 
bought with the money bring returns. The connection of cause 
and effect is really as follows. The deficiency of money is the 
cause of the deficiency of active capital, as just explained. 
And in the same way in which the demand for money, in 
connection with its scarcity, gives to money a command of 
interest (240), so does the need of capital for productive 
processes, in conjunction with its deficiency, impart to capital 
goods, when productively employed, the faculty of returning 
an income. 

Summing up, the lack of money has two direct effects, of 

which the one is a lack of capital goods for productive processes, 

and the other is the interest commanding power of money. It 

has also an indirect effect, growing out of the lack of active 

21 



322 RESTRAINTS ON INDUSTRY [as 

capital, namely the faculty of capital goods to return an 
income when employed in production. 

The borrower of money, when he invests it in active capital, 
is accordingly not a loser, for the returns derived from this 
form of capital compensate him for his outlay of interest. To 
him money is the instrument hy means of which idle and there- 
fore unremunerative capital goods are converted into such as 
afford returns (211). It is to be observed that this presenta- 
tion of the matter differs from that of Calvin in that it is not a 
case of reasoning in a circle, but traces interest to a primary 
cause (204). 

243. The Missing Link in the Productivity Theory. — We 
have now been led to what is virtually a confirmation of the 
productivity theory of interest. Returns accrue to invested 
capital goods by reason of the advantage afforded by the 
last addition of active capital to that in use before (162). 
While the capital in use is limited to the amount OC, Fig. 18, 
the last increment of this capital affords an increase, at the 
rate C'e', in the amount of products obtainable by the given 
amount of labor. Competition for the use of this last incre- 
ment of capital, therefore, naturally tends to raise the price of 
this use to that rate. 

But the productivity theory of interest remains incomplete 
until the limitation of active capital is explained. When the 
capital in active use equals OC, and labor's productivity is 
represented by the area OC'e'E, an addition of C'C to the 
capital would increase the output to the maximum OCE. This 
addition of capital would therefore yield a positive advantage, 
and we can discover no other reason why it is not made than 
the impossibility of converting idle into active capital through 
the process of exchange as rapidly as is necessary to keep pace 
with the conversion of active into idle capital through the 
process of production (211). This impossibility has been 
traced to the insufficiency of the medium of exchange. 

At a former stage (149) we were brought to the conclusion 
that unhampered competition would result in ultimately con- 
ferring upon consumers all of the advantage derived from im- 
proved methods of production, and further on (1926) we also 
found that, in point of fact, the consumers do not reap all of 



243] MONOPOLY THEORY OF INTEREST 323 

this advantage, but that the owners of capital receive a share. 
This incongruity has now been traced to the existence of an 
impersonal monopoly through which the proper assembling of 
capital goods for productive use is impeded and competition 
correspondingly hampered. 

There is a close similarity in the play of economic forces 
which determines prices and that which determines interest. 
In both cases two forces are in operation, one an impelling, 
the other a restraining force. In the production of com- 
modities the impelling force is the desire for the utilities of 
the product, while the restraining force is the reluctance to 
put forth effort, which places a limit on the amount produced. 
In the use of wealth for further production, that is to say, 
in the application of wealth as capital, the advantage afforded 
by capitalistic production is the impelling force, while what- 
ever holds back the setting apart and utilizing of products of 
past labor for purposes of further production constitutes the 
restraining force, the force that puts a limit on the amount of 
capital actively employed. In both cases the recompense — 
value in the one and interest in the other — becomes adjusted 
to the point where a balance between the impelling and the 
restraining force is established. 

A corresponding similarity exists between the various 
theories that have been advanced to account for value and for 
interest. Each of the two sets of theories can be divided into 
two classes, according as they give prominence to the impelling 
or to the restraining forces. In the utility theory of value 
the restraining force, effort or cost, is subordinated, and pre- 
dominance is ascribed to the impelling force, namely desire in- 
duced by utility. The labor or cost theory, on the contrary, 
neglects the impelling force and gives undue prominence to 
the restraining one, namely effort or cost. So, likewise, do we 
find in the productivity theory of interest an absence of due 
regard for the conditions that restrain the conversion of idle 
into active capital, while in the abstinence theory and in the 
"Positive Theory of Capital" the impelling force, the efficiency 
of capital, is not recognized as a factor coequal in importance 
with the one that restrains. 

It is singular that in his theory of value Bohm-Bawerk 



324 RESTRAINTS ON INDUSTRY [243 

gives prominence to the impelling force, the desire to utilize 
things, while in his theory of interest he reverses his position 
by giving prominence to a restraining force, a dislike for wait- 
ing, an unwillingness to accept future gratification in place of 
an equal gratification now. In the one theory he minimizes 
the importance of the dislike for putting forth effort, the 
force that restrains production, while in elaborating the other 
he is imbued with the idea that the productivity of capital, the 
force that impels the utilization of wealth for purposes of 
further production, cannot account for interest. On the one 
hand he considers "utility," the impelling principle, to be the 
causation of value ; on the other he regards the ' ' underestima- 
tion of future goods," a principle restraining the utilization 
of present goods for future purposes, of wealth as capital, to 
be the causation of interest. 

In point of fact, however, that restraining force which he 
thus adduces as the dominant factor in the causation of in- 
terest is really not such at all. The truth is that it is not the 
psychological factor adduced by Bohm-Bawerk, but the exist- 
ing restraint on the facilities of exchange, that is the real 
cause of the insufficiency of active capital and consequently 
the cause of interest. If this restraining factor were removed, 
the amount of capital used productively would rise to a point 
where there is no advantage to be gained by any further addi- 
tion to it, and at this vanishing point the impelling and the 
restraining forces would naturally come to a balance. 

The promulgators and adherents of the various forms of 
the abstinence theory of interest do not seem to realize the 
close relation that exists between it and the productivity 
theory. It is invariably true that capital interest, wherever 
it exists, is due to the advantage which the last available in- 
crement of capital affords in productive use; in other words, 
to the final efficiency of capital, just as the value of com- 
modities is related to their final utility. But considering that 
the "final efficiency" of capital can be greater than nothing 
only so long as the available amount of capital is not enough 
to employ labor at its maximum efficiency, the productivity 
theory, to be complete, must, as already stated, point out why 



244] MONOPOLY THEORY OF INTEREST 325 

the available capital is not enough. The abstinence theory and 
the "Positive Theory" are simply efforts to supply the miss- 
ing link in the productivity theory, although their authors 
seem not to have been aware of this; and that even these 
efforts are founded on defective premises has been shown 
above. 

When we found (192a) that the productivity theory is 
incompetent to explain the phenomenon of interest, it was 
on the assumption that production and exchange were not in 
any way impeded, but this, as we now find, is not the case. 
The arguments advanced by such authorities as Bohm-Bawerk, 
with the object of refuting the various productivity theories, 
proceed likewise on the assumption of complete industrial and 
commercial freedom, and although the conclusions are valid on 
basis of this premise, they do not disprove that capital interest, 
under existing conditions, is due to the advantage afforded 
by the last available addition to capital, that is, to the final 
efficiency of capital, for the simple reason that those arguments 
assume conditions which do not at present exist. 

The lack of capital is not due to natural causes, hence the 
power of capital to command a share in the distribution of the 
results of effort is not a natural attribute, but is acquired 
through the effect of restrictions now in force. While capital is 
indeed a necessary link in the processes of production, it is 
not an active factor, any more than a belt that transmits power 
from pulley to pulley is productive of power. Just as the 
belt is a mere transmitter of energy, so is capital but a passive 
factor in the productive processes, a mere vehicle of effort. It 
does not "earn" the profits which it gets. 

244. The Law of Interest. — Before proceeding to deduce 
from the theory of interest the economic law by which the rate 
of interest is determined, we may well pause briefly to re- 
view the conclusions thus far reached. The factors of the 
problem become more numerous as we proceed ; their relations 
become more complicated. To avoid the danger of getting on 
the wrong track, we must carefully keep in close touch with 
our present line of inquiry, namely that regarding the ad- 



326 RESTRAINTS ON INDUSTRY [244 

vantages afforded by the application of capital and money in 
the processes of production. 

The effective utilization of the discoveries and inventions 
of the past, through which the productivity of labor is in- 
creased, is generally coincident with the employment of an 
increased amount of capital, but since the amount of capital 
available for productive use is inadequate to employ labor at 
its maximum efficiency, capital acquires the power to exact a 
portion of the value produced, at a rate depending on its iinal 
efficiency. 

This final efficiency can become a positive quantity only 
when the amount of capital in productive use is insufficient to 
employ labor at its maximum efficiency. Reverting to the 
diagram Fig. 18, if the capital in productive use is limited to 
OC, the final efficiency is equal to Oi and the rate of interest 
tends to this ordinate (162). The total value produced, which 
is represented by the area OC'e'E, is then divided into two 
parts by the horizontal line ie', the quantity above this line 
accruing to labor, that below to capital. 

If an employer borrows money, it is either to buy addi- 
tional capital goods and employ additional labor, thus increas- 
ing his output, or to pay debts incurred by having previously 
done so. For the purpose of our present analysis we may 
apply the diagram Fig. 18 to that part of his business only 
which has been added through the borrowed money. The area 
OC'e'E then represents the amount produced by the additional 
labor in conjunction with the additional capital represented 
by OC. The rate of interest payable on the borrowed money 
being Oi, the above output is divided by the line ie' into two 
parts, of which the one, OC'e'i, must be devoted to the pay- 
ment of interest on the loan, while the other, ie'E, represents 
the part which accrues to the additional employes for their 
labor and to the employer for the additional service rendered 
by him. The efforts of the employer becoming more efficient 
by such investment of the borrowed money, his wage income 
is increased, and this is the only substantial inducement to 
borrow. 

It is now to be observed that the area OC'e'E represents 



245] MONOPOLY THEORY OF INTEREST 327 

products which, having to be marketed, are idle capital until 
sold. If the borrower now could hand over to the lender that 
portion of his products which, as stated above, must be devoted 
to the payment of interest, the transaction would find its con- 
clusion in the division of the products between labor and 
capital in the proportion in which the line ie' divided the 
total area OC'e'E into two parts. 

But the lenders of money do not agree to any such proposi- 
tion. While their money enables the borrowers to increase the 
quantity of their output of products, they require the interest 
to be paid in money, not in hind. "While the advantage of the 
hat manufacturer, as borrower, accrues to him in the form of 
more hats, or that of the shoe manufacturer in the form of 
more shoes, the lender will not accept his share of the profits in 
the form of hats or of shoes. Before the borrower can apply 
his increased products to the payment of interest, he must sell 
his goods and get money for them (345) . 

At first glance it would appear that this has no bearing on 
the problem itself, but upon closer examination it wiU be found 
that the process of selling his goods introduces complications 
which must be taken into account, and this can be done only 
by an exhaustive study of the circulation of money. 

245. The Barren Circulation of Money.^* — When money 
performs its normal function of mediating exchanges, its flow 
from the buyer to the seller is attended by an opposite and 
equivalent flow of goods from the seller to the buyer. This 
flow of goods embraces the process by which idle capital is 
made active (211). But in the world of affairs there are also 
found currents of money which flow independently of any 
flow of goods. Money passes not only from consumer to mer- 
chant, and from merchant to producer (120), but also be- 
tween lender and borrower. The flow or "circulation" of 

"*The analysis here following is in part a re-statement of an 
article by H. Bilgram, entitled " The Cause of Business Stagnation," 
published in the Annals of the American Academy of Political and 
(Social Science, January, 1905. An outline of the same subject had 
previously been published in the Appendix to "Involuntary Idleness," 
by the same author. 



328 RESTRAINTS ON INDUSTRY [246 

money through which exchanges of goods and services are 
effected may be termed the efficient or fruitful flow, in con- 
tradistinction to that flow in which it does not mediate the ex- 
change of goods or services. While money, in the process of 
lending, passes from hand to hand, it does not perform its 
normal function, it is not given in exchange for goods. Nor is 
an exchange of goods involved when money is used in the 
payment of a loan. Such flow of money as is not effective in 
the exchange of goods may appropriately be termed inefficient 
or barren flow. While modern economists have given attention 
to the efficient circulation, showing that normally the monetary 
flow equals the industrial flow of goods and services (119), the 
study of the barren flow has been entirely neglected, although, 
as we shall learn, it is only through this study that the law of 
interest can be learned. Our next inquiry will therefore be 
centred on that flow of money which results from the process 
of issuing and retiring money, as well as from the lending of 
money and its return. 

For the same reason as that which requires us to distinguish 
between the efficient and the barren flow of money, we must 
also distinguish between debts arising from the delivery of 
goods or the rendering of services and those arising from 
money loans. The former result from a temporaiy excess of 
the industrial flow over the effective monetary flow (270), 
while the latter are incidental to those monetary movements 
which take place apart from distinctively industrial trans- 
actions. As it is of vital importance to make this distinction, 
we shall select the terms ''business debts" and "loan debts" 
to differentiate the same, 

246. The Grov^th of Loan Debts. — When a debtor pays a 
loan, the amount returned exceeds the amount borrowed by 
the interest paid for the loan. The return flow of money to 
the lenders is therefore greater than the outflow from the 
lenders. 

Since lenders who make a business of lending usually apply 
not only the principal, but also more or less of the interest 
received by them for further loans, it follows that the indebted- 
ness of the borrowers to the lenders must constantly increase. 



247] MONOPOLY THEORY OF INTEREST 329 

Furthermore, since with every increase of the sum total of 
loan debts the amount of interest thereon increases corre- 
spondingly; this increase of loan debts takes place in what 
is virtually a geometric progression, at least so long as the 
debtors continue to keep the money in active circulation by 
borrowing. It is however plain enough that a geometric 
progression will in time rise to practically impossible amounts. 
A stage will therefore be reached, sooner or later, when this 
process cannot go on any further. The debtor class will then 
be unable to meet its obligations, and a financial " crash " 
ensues. 

This is but a bare statement of what really goes on. The 
money-lenders spend part of their income for purposes other 
than lending, thus returning some money to active circulation 
without adding to the sum-total of loan debts. On the other 
hand, some workmen place part of their wages in saving banks, 
and some business men apply part of their earnings to loans, 
thereby bringing about an increase of the amount of loan 
debts. "We have accordingly to subject these conditions to a 
closer scrutiny. 

247. Differentiating the Financial from the Industrial 
World. — We have spoken of the circulation of money as being 
divided into a fruitful and a barren flow, and have indicated 
in general the processes of the latter. For a more detailed 
study of this phase of our problem let us consider the lenders 
of money and the users of money as being embraced in two 
separate categories. These we will denominate the " finan- 
cial " and the " industrial " division, it being understood, of 
course, that the term ' ' industrial ' ' includes commercial func- 
tions as well. These two categories accordingly embrace the 
entire range of the economic world. The first class comprises 
the lenders of money and the agents of money issues ; the second 
the buyers and sellers of both capital goods and consumption 
goods in all the various channels of production and exchange. 
Having recognized this distinction, let us carefully observe 
the flow of money passing between the two classes, and espe- 
cially the effect of this process upon the volume of money in 
the active field and upon the volume of loan debts. 



330 RESTRAINTS ON INDUSTRY [247 

It may well be asked whether we can reasonably assume 
such a division of the economic world. The fact that any one 
individual may use some of his money as a medium of exchange 
for the purchase of things or services and some as capital for 
loans, and thus at once functionate in both the industrial and 
the financial sense, may be considered as making such a divi- 
sion logically unassumable. But we are here dealing with 
economic functions rather than with the men who perform 
them. "We have already pointed out (16) that an individual 
may perform various separate economic functions and may 
thus have a correspondingly multiple existence in the economic 
sense. Every man who uses money both for buying things and 
for lending is identified with both the industrial and the 
financial class in the measure in which he is a buyer or a 
lender respectively. He simply performs the part of two 
distinct economic persons. 

Inasmuch as the difference of functions relates to the two 
different uses of money, the sum total of money falls into two 
distinct divisions. When money is on hand for buying things 
or services, it is in position to perform its normal function as 
a medium of exchange ; it is in an active state, as it were. But 
when money is on hand for lending, it is not in position to 
perform its normal function as a medium of exchange and is 
accordingly in a passive state. 

A graphical representation may again facilitate our study. 
Let us assume all money to be contained within an inclosure. 
Fig. 25, which is divided, by a partition, into two compartments 
or fields, the one containing the active, the other the passive 
funds. The field of the passive funds pertains to the lenders of 
money and the agents of money issues, in short, to the financial 
class. The field of the active funds includes the users of 
money, the producers and consumers, in short, the industrial 
class. All money transactions making up the efficient circula- 
tion, comprising all kinds of sales and purchases, take place 
within this field. By thus eliminating that circulation of 
money which mediates the industrial flow, we can confine our 
study to the barren circulation, namely that flow of money 
which does not mediate exchanges and which passes between the 



248] MONOPOLY THEORY OF INTEREST 331 

financial and the industrial classes. The partition which in 
the diagram separates the active from the passive field is repre- 
sented as having openings or channels through which the 
currents of this circulation flow. 

248. The Several Barren Currents. — At first we can dis- 
cern three barren currents passing between the two fields. 
One of these, flowing from the passive to the active division, 
is that which results from the borrowing and lending of 
money.*" This current has the double effect of increasing both 
the volume of active funds and the total sum of loan debts. 
The other two currents flow in the opposite direction. The 
one is the payment of loans and the other the payment of 
interest. Both bring about a diminution of active funds, but 
the first of the two has the additional effect of reducing the 
loan debts. 

It has been pointed out before (139) that gross interest 
really consists of three items : first, compensation for labor and 
other costs connected with the business of lending; second, 
insurance on the risk assumed by lending; and third, pure 
interest, the net profit on money loans. The first of these 
three items is a payment for personal services and is therefore 
a transaction that is to be classed as part of the fruitful circu- 
lation of money, taking place within the division of active 
funds. Only the second and third items are really to be in- 
cluded in the stream of payments passing as interest on loan 
debts from one division to the other.®^ For this reason only 
two items, insurance on risk and interest proper, can, in our 
present consideration, be included in the term ** gross in- 
terest," The interest with which we are here dealing is 

* When notes are discounted, we can, of course, consider only the 
discounted amount as constituting the actual loan. 

•^ When the business of lending is transacted through an agent, 
this agent usually deducts his commission and other expenses, the cost 
of his services, and pays to his client the gross interest minus that cost. 
If the lender himself attends to that business, the item cost accrues to 
him as wages and expenses, and these he receives as member of the 
industrial class. Only the remainder goes to him as member of the 
financial class. 



33^ RESTRAINTS ON INDUSTRY [hq 

therefore only that portion of the gross interest which is not 
in any way a recompense for personal service. 

The currents thus far discussed may be designated by the 
letters L (Loans), P (Payment of Loans) and G (Gross Inter- 
est, consisting of B plus /, Eisk Insurance plus Pure Interest), 

In the long run the current P, namely payments on loan 
debts, will not fully balance the current L, because some 
debtors default in their payments. But the resulting losses 
are made good by that portion R of the gross interest G which is 
devoted to risk insurance (251), For this reason the sum 
P -\- B will in the end equal the loan current L. The effect 
of this system of insurance is the same as though the current 
B were applied to pay off that portion of the debts which the 
delinquent debtors fail to pay. The branch B of the current 
G must therefore be regarded as having the effect of reducing 
the volume of loan debts, while, on the other hand, the branch 
I has no such effect. 

249. Preparatory Currents. — In tracing the circulation of 
money, as it passes to and fro between the passive and the 
active fields, it will be found necessary to recognize two addi- 
tional currents. 

The field of passive funds contains all of that money, in- 
cluding, of course, all of that bank credit, which, after having 
been put into circulation, has found its way back into the 
passive field through either the channel P or G. If there were 
only the three channels L, P, and G available, this money could 
not go into circulation except through lending, in other words, 
by passing through the channel L. But some of this money 
is constantly being put to use for purposes other than lending, 
for instance, for personal requirements, or for investment in 
industrial or commercial pursuits (275). Inasmuch as it is 
only when money is in the active field that it can be put to 
active use, we must needs assume that any money of the 
passive field which is to be put to active use must first be 
transferred into that field. We have accordingly to provide 
in our diagram a channel through which this transfer takes 
place, and this channel is indicated in Fig. 25 at E (Expendi- 
tures). Such use of part of the passive funds must therefore 



249] MONOPOLY THEORY OF INTEREST 333 

be considered as a double transaction; first, as a barren flow 
of money through the channel E from the passive to the active 
field, and second, as a fruitful circulation of money within 
the active field, where it performs its normal function of 
mediating the exchange of goods and services. 

Conversely, money which is circulating in the active field 
may be withdrawn from further active circulation and applied 
to lending. It is thereby directed into the current L, but be- 
fore it can join that current, it must be regarded as having been 
transferred from the field of active to that of passive funds. 
Hence, in the process of lending out money from the active 
field, it undergoes a double transfer; first, a preparatory 
transfer through the channel designated S (Savings), and 
second, the subsequent flow through the channel L. 

In one respect the terms ' ' expenditures ' ' and ' ' savings, ' ' 
selected to denominate the currents E and S, are not properly 
descriptive. These currents should be conceived as being dis- 
tinct from the succeeding transactions to which they are 
merely preparatory. The current E does not represent the 
act of giving money in exchange for things, the act of spend- 
ing it, for that pertains to the efficient circulation. It is made 
up only of those transfers of money from the passive to the 
active field which must be presupposed when money which is 
in the passive field is to be used in the active field. Similarly, 
the current 8 is made up of those transfers that must be 
assumed as preceding the act of lending whenever money which 
is in the active field is being diverted from active use and made 
the subject of lending. 

These preparatory transfers consist of nothing but a change 
in the status of money while in the owner's hands. There is 
no bodily transfer, but only a shifting in the direction of its 
use. "We may view this shifting as though the owner, in his 
capacity of member of the financial class, hands over this 
money to his other economic self, member of the industrial 
class, or vice versa. The money is merely transferred, by the 
will of the owner, from one field to the other. While we must 
regard these transfers as currents, they are currents only in a 
figurative sense. 



334 RESTRAINTS ON INDUSTRY [260 

In another respect, however, the above nomenclature is 
justified. The current E, although representing only a pre- 
paratory change in the direction of the money before it is 
expended, actually measures the amount of money expended 
by the members of the financial group in the industrial market, 
while the current 8 measures the amount of money withdrawn 
from the active field through its being put out at interest ; or, 
if viewed in connection with the attendant augmentation of 
the current L, whereby it is returned to the active field, the 
current 8 measures an increase of the volume of money debts 
unattended by any increase of active funds. 

The five currents above described, one of which is a com- 
posite current, together constitute the barren circulation, and 
each of them has a specific bearing on our problem regarding 
the volume of active funds and the sum of loan debts. Their 
effect may be tabulated as follows : 

Current L Increases Active Funds and Increases Loan Debts. 
P Decreases Active Funds and Decreases Loan Debts. 
B Decreases Active Funds and Decreases Loan Debts. 



{? 



^7 Decreases Active Funds and has no EflFect on Loan Debts. 
E Increases Active Funds and has no Effect on Loan Debts. 
8 Decreases Active Funds and has no Effect on Loan Debts. 

250. The Volume of Active Funds. — A glance at the 
diagram Fig. 25 shows that all changes in the volume of 
money in active circulation are determined wholly by the 
volume of the several currents just described. Whenever the 
currents flowing toward the field of active funds predominate, 
the volume of active funds is increased, and when the reverse 
condition prevails, this volume is reduced. Passive funds can 
go into circulation only by passing through either of the chan- 
nels L or E. On the other hand, money can be removed from 
active circulation only by passing through either of the 
channels P, O or 8!''' 

If we denote by the letter V the volume of funds circulat- 
ing in the active field, and by dV the change or differential of 

" Money which is hoarded is virtually not in active use, but for our 
present inquiry it may be considered as remaining in the division of 
active funds, as long is it is merely hoarded. 



251] MONOPOLY THEORY OF INTEREST 335 

this volume within a given period, the extent of this change 
can be found from the volume of the various currents during 
the same period. This relation can be expressed in the form 
of the equation. 

(1) dV = L — P — R — I-\-E — S. 

This equation will be used below for further deductions. 

251. The Volume of Loan Debts. — ^As we have seen, these 
currents affect not only the volume of money circulating in the 
active field, but also the volume of loan debts, that is, the total 
indebtedness of the industrial to the financial world. 

The volume of loan debts is increased by the current L and 
is reduced by the opposite current P. There is, however, 
another factor, already adverted to (248), which reduces the 
volume of debts, namely the occasional insolvency of debtors. 
A vast amount of loan debts is annually written off to loss on 
this account. But, in the aggregate, this loss is made good by 
that portion of the gross interest G, which constitutes the in- 
surance against risk and which we have designated 7?, the 
portion through which the solvent borrowers are virtually 
made to pay the debts of the insolvent ones (289). It follows, 
then, that L, P and R are the three items governing the volume 
of loan debts. 

As stated before, the loan debts here under consideration 
include only the debts directly incurred by the borrowing of 
money, but not industrial or business debts arising from the 
delivery of goods or services, since the latter transactions are 
clearly such as take place within the active field. 

If now the letter D is used to designate the volume of loan 
debts, and dD the change or differential of this volume during 
a given period, it is evident that : 

(2) dD = L — P — R. 

Substituting in equation (1) for L — P — R its equal dD^ 
as per equation (2) and solving for I, we obtain: 

(3) I = E — S-j-dD — dV. 

This formula presents the conditions which determine the 
total amount of net interest received by the lenders as a class 



336 RESTRAINTS ON INDUSTRY [251 

during any given period. It applies to short as well as to long 
periods, but when long periods are in consideration, the differ- 
ential terms are insignificant as compared with the other terms 
and, accordingly, become negligible. The equation will then 
assume the form : 
(4) l = E — S. 

The two quantities E and S are what we have termed ' ' pre- 
paratory ' ' currents. Of these the current 8 flows opposite to 
the current E, and since the latter measures the expenditure 
of money by the lender class in the industrial market, while 
the current 8 measures the withdrawal of money from the 
industrial market for the purpose of lending, we can regard the 
difference E — 8 as measuring the "net-expenditures" by 
the lenders (272). 

Equation (4) is to be interpreted to the effect that in the 
long run the total interest / received by the lending class equals 
the net-expenditures of that class in the industrial market. 

Applied to a static business condition (252) in which both 
the volume of money in circulation and the total volume of 
loan debts remain unchanged, this equation is, indeed, strictly 
true for both short and long periods. The sum total of loan 
debts can remain stationary only while the currents L, P and 
R of Fig. 25 balance each other, and if the volume of money in 
the active division is also to remain unchanged, the three re- 
maining currents /, E and 8 must likewise balance, and this 
is expressed by formula (4). 

The business world is, however, not insuch static condition. 
Changes constantly occur which affect both the volume of loan 
debts and the volume of money in actual use. But neither the 
one nor the other can be increased or reduced indefinitely, and 
for this reason the equation (4), although but an approxima- 
tion, is practically true in the long run. This means that the 
total net-interest I, accruing to the lenders of money, cannot 
indefinitely exceed the difference between E and 8, nor can it 
be indefinitely less (274). There are periods in which the 
volume I exceeds the difference E — 8, but such periods must 
necessarily be succeeded by other periods in which the condi- 



252] MONOPOLY THEORY OF INTEREST 337 

tions are reversed, E — S then exceeding the volume of I. 
For the study of these periodic changes, which we shall take 
up in the next chapter (271), we must have recourse to the 
unabbreviated equation (3), which is correct under all condi- 
tions. In the present chapter we shall confine our investigation 
principally to the proposition that the volume of 7 cannot con- 
tinuously exceed the difference E — 8 on the ground that 
equation (4) is substantially true, although temporary de- 
partures on either side may occur.®^ 

252. The Rate of Interest. — If I, the total net income 
accruing as interest, and D, the sum total of loan debts, are 
given, the determination of the rate of interest is a question of 
simple arithmetic. Suppose we could obtain the respective 
data covering the period of one year, the rate i of interest 
would be found as follows : 

i=:100Xl-^D. 

Since the value of D is unavoidably variable during the 
period, the value of i should really be obtained by a process of 
integration, but for our purpose it will suffice to assume that 
the corresponding average of D is given. 

By inserting the value of I from formula (3), we obtain 
(267) : 
(5) i = 100X{E — S-\-dD — dV)-i-D, 

or, by applying the abbreviated equation (4j, we obtain the 

" It is a fact that in long periods the total volume V of our money, 
including bank credit, slowly increases, principally because of the slow 
increase of our stock of gold and the coincident expansion of the 
system of bank credit. But the same is also true for the total volume 
D of the indebtedness of the industrial to the financial world. In as- 
suming that the difference dD — dV can be neglected, we not only ignore 
the periodic fluctuations of the quantities D and V, but we also take for 
granted, in considering long periods, either that both do not change at 
all, or, if they do change, that the change ia equal for both. This is 
indeed nearly the case, for every increase of bank credit is attended 
by a nearly equal increase of business debts. But while there is some 
.difference, formula (4), though true in the main, is not mathematically 
correct. On the other hand, all deductions based on formula(3) are 
accurate throughout. 

22 



338 RESTRAINTS ON INDUSTRY [253 

rate of interest prevailing under static conditions (251) as 

follows : 

(6) i = 100X{E — S)-^D. 

This last formula also represents the general average rate 
of interest in the actual business world. 

The volume of the currents E and S, which we termed 
preparatory currents, depends solely on the option of those 
who have the money to spend. They are free to make such 
use of it as seems fitting to them. Their motives for using it in 
one way or another are not within the scope of our present 
inquiry. E and 8 are accordingly quantities which are inde- 
pendent of other economic factors and, like the quantity D, 
must be accepted as economically fundamental data. Hence 
the formulas (5) and (6) express the law of interest, at least 
as regards money loans. 

253. A Seeming Contradiction. — This law appears to be 
inconsistent with our earlier conclusions, according to which 
the rate of interest depends on the final efficiency of money 
(242-244). There can be no possible relationship between the 
productivity of the last increment of capital made available 
by the last increment of the volume of money on the one hand 
and the quantities E, S, and D on the other. But the reason 
of this manifest discrepancy is not far to seek. Let us for the 
moment take recourse to an analogy in dynamics. 

Isaac Newton showed that the velocity of a falling body 
constantly increases and, at any moment, is proportional to the 
time of the fall, or to the square root of the height through 
which the body has fallen. This law is, however, not verified 
in the descent of a drop of water falling through the air from 
a great elevation. At the start it has indeed an accelerated 
motion in accordance with Newton's law, but presently the 
acceleration becomes less, and finally the drop continues its 
downward course with a nearly uniform instead of an acceler- 
ated motion. 

This fact is strikingly illustrated in nature by a number of 
high waterfalls, among them that of the Staubbaeh near 
Lauterbrunnen, Switzerland. This stream descends the upper 



254] MONOPOLY THEORY OF INTEREST 339 

slope of the mountain in large irregular billows which, upon 
breaking over the brink of the fall, partake at first of an 
accelerated motion. But after descending through a small 
part of their plunge they break into spray and continue to fall 
in curtain-like festoons at a speed which is quite uniform, as 
far as the eye can judge. 

Why is it that these descending drops fail to follow the 
universal law of falling bodies ? For the simple reason that an 
interfering factor, the resistance of the air, modifies the motion 
and finally develops a reacting force equal to the weight of the 
drop, when acceleration ceases and the motion becomes uni- 
form. The velocity of the falling drop is ruled by a law 
radically different from the law of falling bodies which Newton 
traced to the primary cause, gravity. . The final velocity of the 
drop depends neither on the time nor on the height of its 
descent, but on its weight and size, on the density of the air 
and on the law of the resistance of bodies moving in fluids. 
Yet, this fact in no sense contravenes Newton's law of falling 
bodies. In like manner, with regard to the law of interest, if 
it is possible to discover an interfering force analogous to the 
resistance which the air presents to the falling drop, a force 
which prevents the rate of interest from becoming adjusted to 
the final efficiency of money or of capital goods, the cause of the 
discrepancy between our recent conclusion and the previous 
one will have been brought to light. 

254. Effect of the Interest Power of Money. — The fact 
that money loaned at interest renders an income without 
further labor on the part of the lender is a powerful incentive 
to withhold money from the channels of exchange and to direct 
it into the channel of loans. Lenders not only endeavor to 
lend out again the principal of the loans returned to them by 
borrowers, but they also offer part of their interest income to 
further increase their loans. They naturally strive to expend 
less than their income from interest, and this constitutes a 
tendency to keep the current E below the current I. Thus 
only a portion of their income is restored to circulation by 
passing through the channel E, while the remainder, namely, 
7 — E, goes into circulation by passing through the channel 



340 RESTRAINTS ON INDUSTRY [255 

L, and this causes an increase of loan debts. The fact that 
some men actually spend more than their income, dissipating a 
portion or even all of their means, is here negligible, since we 
survey the community as a whole. The desire to increase loan 
investments obviously predominates so that E is naturally less 
than I, at least while * ' business is good. ' ' 

Members of the industrial group are likewise intent on sav- 
ing money for lending. Merchants and manufacturers fre- 
quently invest their money savings in bonds and mortgages, 
and many of the workmen whose wages little more than 
suffice for the necessaries of life take what they can spare to 
savings banks. Thus the current 8 springs from a natural 
desire of men to put out money at interest. 

If, then, E tends to be less than /, the difference E — S 
must be still less, and the natural tendency is that equation (4) , 
I =: E — 8, will not be satisfied. 

255. Inevitable Consequence. — It is not difficult to foresee 
what must be the consequence. Let us assume that the differ- 
ence E — ;S^ is really less than I, in other words, that I — E 
+ ^ is a positive quantity. Since formula (3) can be presented 
in the form 

I~E-{-8 = dD — dV, 

a glance will show that / — E -\- 8 can be positive only if either 
dD is positive or dV is negative. A positive dD indicates a 
constantly increasing indebtedness, while a negative dV signi- 
fies a constantly decreasing volume of money in circulation. 
Hence the business world must submit to the one or the other 
of these two evils, and since money is imperatively needed for 
the transaction of business, an indefinite reduction of money in 
use cannot be supposed. The business world has practically no 
choice but to borrow as much as possible of the money offered 
for loan in the money market, and a gradual increase of the 
volume of loan debts is the unavoidable consequence (281). 
But with every increase of these debts the payment of interest 
increases, and the process described accelerates until debts be- 
come overwhelming and bankruptcy ensues. If the whole in- 
dustrial world were consolidated into one company which still 



255] MONOPOLY THEORY OF INTEREST 341 

remained under the necessity of borrowing money on interest 
from the financial world, this company could not possibly escape 
ultimate bankruptcy. 

This statement must not be misunderstood. It does not 
mean that every independent business man is approaching ruin, 
nor even that a large percentage of them are in this condition. 
The conclusion must be interpreted as follows : 

The active field embraces the debtor class, for a large 
number of business men are working in part with borrowed 
capital. The fact that the sum total of these debts goes on in- 
creasing, as just shown, together with the fact that some busi- 
ness men succeed in lessening their debts, simply implies that 
the debts of others are more than correspondingly increasing. 
The victims of this fateful condition find that in the so-called 
'' competitive struggle " their gross income is insufficient to 
cover expenses. In the vain hope of making good the deficit, 
they continue to produce, struggling under overpowering dis- 
advantages and hoping for better times, until their debts equal 
and finally exceed the capital they employ. In the end they 
must succumb to the inevitable ; they fail (257, 280, 304, 340, 
345). 

The conclusion that the sum total of loan debts tends stead- 
ily to increase, especially in years of prosperity, is fully con- 
firmed by established facts (344). The constantly increasing 
public indebtedness, particularly in Europe, is viewed by many 
with foreboding. The growth of bonded debts of railroad com- 
panies and other industrial and commercial corporations, par- 
ticularly in America, is still more alarming. The expansion 
of bank deposits is usually heralded as an evidence of pros- 
perity, but under existing conditions it has also its dark side, 
which is rarely noted. Since about 'seven-eighths of all bank 
deposits represent commercial loan debts (104), it is obvious 
that every increase of bank deposits means a positive increase 
of interest-bearing loan debts. 

Still more positive confirmation of our theory is furnished 
by the fact that there are always numbers of business men who 
are on the verge of bankruptcy, brought there, not for lack of 
a normally remunerative business, but because of the long- 



342 RESTRAINTS ON INDUSTRY [256 

continued and constantly increasing drain upon their business 
incomes by the payment of interest on a constantly increasing 
debt. In fact, business failures are reported by mercantile 
agencies without intermission. It is now generally assimied 
that commercial failures which are not positively fraudulent or 
traceable to evident lack of business capacity are due to 
economic reactions for which bankrupts cannot be held respon- 
sible and which must be considered as an unavoidable concomi- 
tant of business activity. 

256. Effect of Business Failures on Pure Interest. — The 
delinquency of borrowers puts on the lenders a loss which must 
be covered out of the gross interest. In other words, a greater 
or less portion of the gross interest is to cover losses involved in 
lending. This latter item is what we have designated by the 
letter E. Any increase of these losses, while the gross interest 
G remains unchanged, implies a corresponding reduction of the 
net interest I (274). This reduction is imposed by conditions 
which the lenders cannot control. By increasing the item U, 
business failures cause a reduction of the item I of the gross 
interest until it falls below the difference E — S, whether or 
not the quantities E and 8 are affected at the same time. The 
preceding excess of I over that difference is then reversed, so 
that in the long run the equation I =: E — /S is satisfied. 

"While a falling drop of water, in its descent, has a tendency 
to follow Newton's law of falling bodies, it is prevented from 
exceeding a certain velocity by the resistance of the air. In 
like manner, while the rate of interest tends to adapt itself to 
the final efficiency of money, the total amount of net interest 
I is prevented from indefinitely exceeding the difference E — 8 
by the physical impossibility of the industrial world continu- 
ously returning to the financial world more money through the 
channels / and 8 than it receives through the channel E. This 
is the interfering factor in our present case ; the analogy with 
the falling rain drop is in fact complete. The conflict between 
final efficiency of money on the one hand, and the impossibility 
of continuously giving more money than is received on the 
other, results in the constant recurrence of failures in the 
business world. The rate of interest is as high as the market 



257] MONOPOLY THEORY OF INTEREST 343 

can bear and cannot, for this reason, rise to the rate that would 
correspond to the final efficiency of money (240). The equa- 
tions (5) and (6) must therefore finally be accepted as ex- 
pressing the law of interest in its relation to money loans, the 
first being a precise statement, the second an approximation, 
giving the average rate. 

257. Rate of Capital Interest. — For reasons just explained 
(255) there are at all times and in all trades producers who are 
in debt to the extent of the capital they employ. From the 
capitalist's standpoint these are obviously the marginal pro- 
ducers, namely, those who, as regards the use of capital, are 
working under the most unfavorable circumstances under 
which production is being continued (62, 348). The interest 
paid on money loans by the marginal producers, that is, by 
the producers who are indebted to the limit of their capital, 
is an expense which they cannot escape under present condi- 
tions. Their expense in producing the goods is equal to the 
cost (61) of conducting the business plus the interest paid on 
the borrowed money. The more fortunate business man who 
owns the capital employed by him and who, therefore, is not 
under obligation to pay interest, can produce the same goods at 
the mere cost of conducting the business. But whatever it may 
cost the different producers to make the goods, the selling price 
is the same for all, and this price is established by what it 
costs the marginal producer to make the goods. Hence those 
who own the capital they employ reap a profit on their sales 
equal to the m.oney interest which the completely indebted 
producer must pay, and this profit is what constitutes capital 
returns (265). It is in this way that capital goods acquire 
what appears to be an earning power, the rate of which is the 
same as that of money interest (209). 

Referring to Fig. 13, the business man who is indebted to 
the extent of his entire capital must pay money interest equal 
to CE, hence the cost of production to him, counting the value 
FG of his own services at market rates, is made up of cost 
of supplies AB, rent BC, interest CE and wages EG. He being 
the marginal producer, this cost determines the market value 



344 RESTRAINTS ON INDUSTRY [258. 259 

of the products, and he gets only the value FG of his own 
services as net income from his business. The capitalist who 
owns all his capital, except the land, can produce at a cost 
equal to AB -\-BG -\- EG, and his profits from the sale of his 
products, apart from his wages FG, are equal to CE. Or if 
he is partially indebted and must pay money interest to the 
amount of DE, his capital profits are represented by CD. 

258. Capital Interest an Intra-Marginal Profit. — We are 
now brought to a recognition of the fact that the interest sup- 
posed to be earned by capital goods is after all analogous to the 
rent of land (187), at least in that both are intra-marginal 
profits. These profits accrue to the owner of capital goods by 
virtue of his advantage over the marginal producer, who must 
pay interest on an amount of money equal to the capital em- 
ployed. This advantage being equal to the interest paid by 
the marginal producer accounts for the fact that the rate of 
interest returned by capital goods equals the rate of interest on 
money (131, 267). 

This appears to conflict with a former conclusion to the 
effect that the rate of capital interest tends to rise to the final 
efficiency of capital, while, according to the above, it rises only 
to the actual rate of money interest, which we found to be 
below the final efficiency of money. This discrepancy is ex- 
plained by the recurrence of periods of business stagnation, 
when a portion of capital is condemned to idleness. Capital 
returns are correspondingly reduced and do not rise above the 
rate of money interest. 

The reason why capital has the power to ' ' earn ' ' an income is 
due to the fact that money has the power to command interest. 
To summarize : (1) the power of money to command interest is 
due to the inadequacy of its volume to mediate all the ex- 
changes necessary to permit the free development of industry ; 
(2) the power of capital goods to yield "earnings" is due to 
the advantage possessed by the intra-marginal producer who 
owns his capital over the marginal producer who is in debt for 
all his capital and must pay interest on that debt. 

259. Currency Laws Examined. — Having found that the 
power of money to command interest is due to the limitation 



259] MONOPOLY THEORY OF INTEREST 345 

of the volume of money, and that this limitation results from 
the operation of prevailing currency laws, we have next to 
determine in what way and to what extent that limitation is 
justified. To this end we may here apply the test of equity 
proposed in an earlier chapter (20) and analyze the process 
by which money is produced, with a view of learning the nature 
of the rights granted and the duties imposed by currency 
laws. 

Money is an instrument of exchange by the use of which 
simple barter becomes expanded into complex barter, into ex- 
change through purchase and sale (83). In the process of 
simple barter the exchange of one thing for another is effected 
by one reciprocal transaction, while in the process of exchange 
through sale two transactions are required : first, a giving of 
goods for money, and then a giving of money for other goods. 
These two transactions or sales are separated by a sensible 
period of time, and during this time the money serves as an 
evidence that the holder has given goods before receiving 
goods. He is creditor of the money system to the extent of 
the money which he holds (89). But this necessarily implies 
that someone else has received goods before giving goods, 
thereby becoming debtor of the money system (92). 

In any system of credit money those who have the right to 
issue either currency or bank credit acquire through such 
issue the means wherewith to buy before they need sell, and 
thus to receive before giving; they have the right to become 
debtors of the money system and to remain possessors of 
wealth they do not own so long as the currency issued by them 
remains in circulation. We must, of course, not confuse the 
giving of goods with the mere pledging of goods. The issuer 
must give security when he obtains the currency. But since 
he retains possession of the wealth pledged, or at least con- 
tinues to enjoy the usufruct of the pledge, he cannot be re- 
garded as having parted with wealth, so that the first time the 
money is given for goods or services, the giver of the money, 
who thus becomes its issuer, receives goods without having 
given goods. 

On the other hand, the members of the community who 



346 RESTRAINTS ON INDUSTRY [259 

have consented to use these notes as money have thereby taken 
upon themselves the obligation or duty to give before receiv- 
ing, in short, to become and remain lenders of wealth, or 
creditors, to the extent of the currency which they individually 
hold and which, as a community, they maintain in circulation. 
This clearly outlines the nature of the rights and duties 
embraced in any currency system. 

These considerations do not strictly apply to the issuers 
of gold coin. In this case the giving and receiving of actual 
wealth are coincident. It is therefore necessary to consider 
the right and duty involved in the coinage system from 
another point of view. 

Ordinarily a person can obtain money for merchandise 
only when he succeeds in finding a purchaser for his goods. 
The issuer of gold coin, on the contrary, obtains money with- 
out going to this trouble. He need only take the gold to the 
mint and have it converted into money instead of selling it 
as merchandise (93). In this way the owner of gold is 
saved the necessity of doing the merchant's work. Gold is 
therefore a merchandise which can be converted into money 
without the effort and uncertainties attending the finding of 
a purchaser; its market is assured. The value of all other 
merchandise can become realized only through the efforts of 
the merchant to find a purchaser, and in this respect that 
value is precarious. Such is not the case with any metal 
admitted to free coinage. This unique position of the money 
metals misled those economists of the eighteenth century 
known as the Mercantilists into the belief that nothing but 
gold and silver constitute the wealth of a country. 

It is thus clear that the owner of goods in the form of gold 
metal is accorded by law the right to have his goods coined 
into money, while, on the other hand, the owners of all other 
goods are not only under the necessity of first finding a 
purchaser for them before they can get money, but are 
furthermore in duty bound to accept the proffer of the gold 
metal in coined form as money in exchange for their goods. 
This clearly presents the correlative conditions of right and 
duty embraced in the coinage system. 



260] MONOPOLY THEORY OF INTEREST 347 

260. Existing Currency Laws Inequitable. — It may seem 
strange to describe the consent of sellers to accept money in 
exchange for goods as a duty or obligation, in the face of the 
fact that all are really striving to make such exchange. But 
we must remember that coin and currency notes can become 
money only by virtue of the general consent to accept them in 
trade. This is really an agreement to give actual wealth in 
exchange for a mere credit instrument (93), and such accept- 
ance of the money in accordance with the agreement is mani- 
festly in the nature of an obligation or duty. Though this 
duty is not usually regarded as onerous, it still remains a 
duty, and the question before us is whether those upon 
whom that duty is imposed are accorded a corresponding 
right (20). 

To be sure, a right to issue currency cannot be granted 
unconditionally; certain provisions must be observed with- 
out which a sound currency is impossible. Chief among these 
is the obligation to pledge security, for without security there 
can be no credit in the economic sense. Making the right to 
issue currency contingent on furnishing adequate security is 
therefore not an undue requirement. But in so far as addi- 
tional and arbitrary conditions are imposed by law, all who 
must needs submit to the obligation of accepting the currency 
are unduly restricted in the exercise of the corresponding 
right of issuing it (261). And such is indeed the effect of 
present currency laws. 

Arbitrary restrictions on the right to issue currency are 
imposed in three different ways: (1) by specifically limiting 
the maximum amount of currency to be issued; (2) by too 
narrowly prescribing the kind of security acceptable as a 
basis for currency; and (3) by imposing a tax on the issue 
of currency exceeding insurance against risk of loss through 
depreciation of the security. 

Let us more closely consider the nature of these restrictions 
in their order. 

First: When laws establish a definite limitation to the 
amount of currency that may be issued, applicants for addi- 
tional issues must be refused, even though they offer to 



348 RESTRAINTS ON INDUSTRY [260 

comply with all economically necessary conditions. Such laws 
are an arbitrary denial of a right to which all are justly en- 
titled who submit to the corresponding duty of accepting the 
currency as a medium of exchange. The laws which prescribe 
that banks must hold a certain reserve of lawful money, while 
yet the amount of lawful money is arbitrarily limited by law, 
belong to this category. 

Second : The securities acceptable under the law as a basis 
for currency issues may exist in quantities insufficient to 
cover the need for currency. That such is now the case in 
regard to national bank currency, for which only national 
bonds are acceptable as security, is shown by the fact that 
these bonds, though bearing a very low rate of interest, have 
all along been at a premium. 

The claim that this limit is imposed in order to make the 
currency safe cannot be sustained, for the routine of deposit 
banking demonstrates conclusively that carefully scrutinized 
and assured business credits can be used as money with safety. 
About seven eighths of the assets upon which bank credit 
rests consist of business credits, and bank credit is constantly 
doing the work of money. While business credits are not 
well adapted for acceptance as security by the government, 
there are other securities, like real estate, available in abund- 
ance. It is decidedly a violation of justice to confine the kind 
of wealth acceptable as security for the issue of currency to 
one or a few forms of property, unless there exists so much 
of this property that its use for the purpose will engage but a 
fraction of the supply and therefore will not cause an appre- 
ciation of its value. That federal bonds do not conform to 
this condition is indicated above. 

Third: The imposition of any tax beyond necessary in- 
surance on the right to use credit as a medium of exchange is 
virtually an arbitrary limitation of a right which in justice 
inheres to all who submit to the corresponding obligation. A 
tax covering insurance against default of the credit cannot 
be viewed as a tax on the conversion of assured credit into 
money. But every additional tax is indefensible. It has the 
same effect that a specific limitation of the volume of currency 



261] MONOPOLY THEORY OF INTEREST 349 

would have. This can be elucidated by the diagram Fig. 22, 
where the curve EE' represents the decreasing efficiency of 
consecutive increments of money. It is manifest that a tax 
equal to Oi has the effect of forbidding the issue of that 
portion of currency which lies beyond the point V, since the 
efficiency of the increments located between V and E' is not 
enough to cover the tax. The same labor that under the 
fullest freedom of exchange would produce an amount repre- 
sented by the area OE'E, cannot economically produce more 
than an amount corresponding to OVaE (262). Labor is 
forcibly prevented from using the most advantageous methods 
of production; nature's forces are not utilized to the best 
advantage known in the arts. Moreover, of the reduced 
product an amount equal to the area, OVai must be devoted 
to the payment of interest to the money-lender, and the 
producer has only the remainder iaE out of which to cover all 
other costs, including his own wages and those of his employes. 

So long as any of these three impediments are placed in 
the way of freedom of exchange, the public, bound by the 
duties imposed by the currency laws, is deprived of the 
corresponding rights, and the laws are to that extent 
inequitable. 

261. Pure Interest a Monopoly Tax. — The advocates of 
laws obstructing the issue of currency do not deny that the 
purpose of such laws is to limit the volume of money. They 
believe that the stability of currency requires this limitation. 
But they fail to realize that this constitutes an interference 
with the freedom of exchange, whereby a monopoly of the 
impersonal type (232) is created, which has a twofold effect. 
On the one hand it restricts the right of the producers of wealth 
freely to exchange the products of their labor, and since ex- 
changes are indispensable to modern production, it virtually 
constitutes a restriction of the right to work (291, 347) . On the 
other hand, it imparts to money directly, and to capital goods 
indirectly, the power of returning continuous unearned in- 
comes to lenders of money and to owners of capital. That 
this monopoly is sustained by laws that are essentially in- 
equitable has been demonstrated above (260). The right to 



350 RESTRAINTS ON INDUSTRY [262 

use assured credit as a medium of exchange has been trans- 
formed into a privilege. It is this privilege which gives to 
money its interest commanding power. Interest is clearly- 
traceable to a monopoly upheld by law. 

At first glance it may appear that this conclusion is incon- 
sistent with the fact that interest was paid for the use of 
money in ancient times, when currency laws were yet un- 
known. But a closer examination of the subject wiU. clear 
away this apparent inconsistency. 

In the earlier stages of civilization the risk assumed by the 
lender of money was much greater than it is to-day, and the 
main item of the interest charge was insurance against risk. 
Such portion of that charge as constituted pure interest was 
doubtless due to the general scarcity of money which, in the 
absence of the use of credit as a medium of exchange, was 
confined to the precious metals, of which but very limited 
quantities were used as money (329). In the course of time 
the precious metals have been supplemented and to some ex- 
tent displaced by the application of credit as a substance of 
money, but while the natural cause of the insufficiency of 
money has thus been removed, another cause to the same 
effect has come into force, namely, the arbitrary limitation 
of the circulating medium by law. 

262. The Power of the Money Monopoly. — In the light 
of these conclusions it becomes possible to survey the extent 
of the harm which the money monopoly is capable of inflicting 
upon the community (235). The greatest injury the public 
could possibly suffer in this direction is that which would 
result from a total abolition of money in all its various forms. 
This would manifestly reduce the community to that primitive 
state in which each individual must make with his own hands 
that which he wants. 

But forcing the scarcity of money to the extreme of its 
total elimination would benefit no one. In the money 
monopoly, as in aU others, a certain degree of moderation of 
its exercise affords a maximum benefit to those who are in 
position to gain profit from it (234). How nearly this degree 
is approached under the prevailing limitations of the currency 



263] MONOPOLY THEORY OF INTEREST 351 

cannot be judged. At all events, the volume of money per- 
mitted to the community by our laws is such that industrial 
progress is only obstructed, not prevented, but to whatever 
extent the monopoly is operative, the country's industries 
suffer thereby. 

Every branch of industry and commerce feels the evil in- 
fluence of this monopoly. It ramifies through every province 
of activity, because every branch of industry, every channel 
of commerce, depends on exchanges, and so far as this 
monopoly restricts exchanges, it has the effect of hampering 
aU productive efforts. It causes a certain amount of labor 
to go to waste, partly by reason of labor's inefficient utiliza- 
tion (159, 260), and partly through the enforced idleness of 
some labor (270). It is impossible to conceive of any other 
form of monopoly which has so potent and at the same time 
so injurious an influence on every individual, every com- 
munity, every nation and on the whole economic world. 

263. Service Rendered by the Lender of Money. — The 

gross income from money loans, the return commonly called 
"interest," accrues to the lender of money in return for 
three different services rendered by him, corresponding to the 
three items of which gross interest consists (139a). 

The first is the service of attending to the business of lend- 
ing. If the loan is one of long time, like a mortgage or a 
bonded loan, this item makes a very small part of the whole. 
Those who make a business of negotiating such loans and 
attending to their details, usually obtain a compensation 
which, being determined by competition, represents the aver- 
age value of this service. If the lender himself does this work 
instead of hiring an agent for the purpose, he may be con- 
sidered as having earned this portion by his personal effort. 

The service so rendered has a specific usefulness. What- 
ever the method of its issue, the currency must be directed 
into the channels where it is needed. This is the normal 
function of the banker and the money-lender, who thus per- 
form a definite service to the community. 

In the case of discounts by deposit banks, the work done for 



352 RESTRAINTS ON INDUSTRY 

the borrower incidentally includes various services in addition 
to that of attending to the details of the loan proper, services 
which are not entailed in the case of ordinary long-time loans. 
The work of effecting the clearance of exchanges through the 
check system, the collection of notes, drafts, etc., may be cited 
as the most important of these extraneous services, and the 
payment for these is taken out of the discounts (139&). 

The second form of service is that of insuring the credit 
of the borrowers. Money-lenders invariably run some risk 
of having difficulty and possible expense in the ultimate col- 
lection of their dues, or of losing a part or all of the sum 
loaned, and according as the risk appears greater or less, 
lenders of money are correspondingly reluctant to lend, and 
the borrowers have accordingly to pay the second item of in- 
terest, the insurance premium, to overcome this reluctance. 
In the concourse of the money market this premium is such 
that, in the general average, losses of this nature are covered 
by this second item (220). The payment of this item on the 
part of the borrowers virtually places the lenders in the posi- 
tion of insurers of the borrowers ' credit, these pajonents by all 
borrowers in general covering the losses sustained by the 
lenders in individual cases. 

264. The Third Item o£ Gross Interest. — It is generally 
held that the service for which pure interest, the third item 
of the gross interest, is paid to the lender, consists in furnish- 
ing capital to the borrower. That this view is erroneous has 
been proven above (210&). 

The real nature of the service which lenders render to 
borrowers, apart from the services already mentioned, can 
best be studied by considering a loan as being what it really 
is, namely, an exchange of two credits, and then earefuUy 
comparing that which is given by the lenders with that which 
is given by the borrowers. 

When a borrower obtains a loan, he gives his promise to 
pay, his credit, and gets in return money, which is but another 
form of credit. Our inquiry is therefore narrowed down to 
the question as to what it is that distinguishes the credit given 
by the borrower from that given by the lender, for in that 



264] MONOPOLY THEORY OF INTEREST 353 

distinction we must look for the real nature of the service 
for which the third item of interest is demanded by the lender 
and paid by the borrower. 

The lender may give lawful money, or bank notes, or 
some form of bank credit, that is, an order on a bank to 
transfer bank credit from the lender to the borrower. That 
which is furnished by the lender is either a credit authorized 
as a medium of exchange by law, or, in case he gives non- 
legal-tender notes or bank cheeks, a credit permitted to be used 
as a medium of exchange under the law. The credit given by 
the borrower must be presumed to be as sound as that given 
by the lender, inasmuch as a premium for its insurance is 
being paid to the lender. The only difference between the two 
credits exchanged is that the credit furnished by the lender is 
monetized credit, that is to say, credit placed within the range 
of that communal agreement that makes it acceptable as a 
medium of exchange, while that furnished by the borrower is 
not monetized credit (238). 

There is no good reason why the borrower's credit, properly 
secured and insured, cannot be put into a form in which it can 
be utilized as a medium of exchange (103) without the pay- 
ment of more than the cost of the labor involved and of in- 
surance. There is nothing to prevent it but the restraint of 
law. The business man in need of a medium of exchange must 
turn to the money lender for help and pay him interest for a 
service which consists of nothing more than an intermediation 
in the monetization of credit. The labor of this intermedia- 
tion is naturally paid for by the first item of gross interest, 
and there would be no additional cost but for the provisions 
of law which obstruct the monetization of credit (341). This 
third item of gross interest, usually the largest fraction of 
that charge, is in fact due wholly to misdirected interference 
of law with the freedom of exchange. 

If the case is viewed from still another standpoint, our 
conclusions are further verified. 

Although bank credit as such is no more reliable than any 
other credit that is equally assured, it is specially privileged, 
within certain limitations of law, to be used as money. The 
23 



354 RESTRAINTS ON INDUSTRY [264 

iransformation of bank credit into money is effected through 
the general consent of the community to accept notes issued 
by the bank and checks drawn on the bank in payment for 
goods sold or for services rendered. It is the community 
which converts hank credit into money. It is the people who 
perform that service for which the banker obtains the third 
item of the gross interest. Indeed, those very members of the 
community who play the largest part in the performance 
of that service, the business men, must, when they become 
borrowers, buy back at a price the very service which they, 
in common with others, have performed gratuitously. The 
business men who borrow are the real issuers of bank notes 
(102) and bank credit (105). They are the debtors in regard 
to the currency and bank credit issued through them, while 
the people who accept the currency and the bank credit be- 
come thereby the creditors of these money systems, the lenders 
of the actual capital. The bank is merely an intermediary 
agent in the process of issue. The issuers or debtors do in- 
deed pay interest on these debts, but they pay it to the inter- 
mediaries of the issue and not to the creditors, the holders of 
the notes or the owners of the bank credit. The banker earns 
only the "cost" and the "risk" items of the gross interest, 
in that he performs the agent's work and effects the insur- 
ance of the possible risk attached to the real issuer's security. 
But he gets more than what he earns; he retains all three 
items of interest. The users of the currency, those who are 
the real creditors of the case, the lenders of the real capital, 
and to whom pure interest, the third item of the gross interest, 
should properly go, if it were true that the lender of capital 
goods is entitled to interest, do not receive it and do not even 
expect it (210a). Through the limitation of money by pro- 
vision of law, which results in the impersonal monopoly of 
money, the borrower of money must pay to the dealer in 
money not only his proper earnings, but also the third item 
of gross interest in the form of interest proper. It is clear 
that the payment of the third item of interest is in the nature 
of a tax paid by those who work for the privilege of using 
their own credit as a medium for exchanging their products, 



265] MONOPOLY THEORY OF INTEREST 355 

a tax imposed through the operation of law-protected im- 
personal and inequitable monopoly. 

265. Service Rendered by the Capitalist. — Generally 
speaking, that portion of the income of an industrial group 
which goes to the owner of the capital goods employed con- 
sists of two items (139a), namely (1) amortization, that is to 
say, compensation for the wear and tear and consequent de- 
preciation of his capital, and (2) compensation for the use 
of that capital. Personal services cannot be considered here 
since these are excluded from the function of the capitalist 
by our definition of that function (143a). 

In the first capacity the capitalist is either a contributor 
of the capital goods utilized by the industrial group, or, more 
frequently, a contributor of the money with which those goods 
are bought and aggregated to the end in view. His position 
differs, however, from that of a money-lender in that he is not 
entitled to receive a stated amount of money at a given future 
time, but is the owner of the capital goods bought with his 
money. Being the owner of that capital, there accrues to him, 
in the average, insurance in the measure in which he runs the 
risk of losing it, and amortization, as the goods deteriorate. 
Usually these items are not paid to the capitalist, but are 
applied to make good the deterioration of the capital by 
insurance, repair and replacement, in order that its value 
may remain intact. Thus, in this capacity the capitalist 
either receives in instalments, or retains undiminished as 
owner, the equivalent of what he gives, nothing more. In- 
deed, as supplier of the capital goods and eventually recipient 
of amortization, he is not to be regarded as a member of the 
group, being in this respect nothing more than an agent in 
the purchase of the capital goods from other groups (139&, 
143&, 157). 

When we come to consider the ''capitalist" in his second 
capacity, that of ovmer of the capital employed by a given 
group, his position must be carefully distinguished from that 
of the employer, with which it is often erroneously confused. 
The income that normally accrues to the employer consists of 
wages which are the recompense for the work involved in 



356 RESTRAINTS ON INDUSTRY [266 

managing the business. The capitalist as such is a passive 
agent, one who simply leaves the use of his capital to the 
productive group (154), without doing any work himself. 

Examining the position of the capitalist, we find that he 
replaces the money-lender, by enabling the group to do its 
work of production without having recourse to borrowed 
money. His service is therefore analogous to that of the 
money-lender, and his recompense for that service can have 
no other basis than has the recompense paid for the service of 
the money-lender (257). The capitalist's claim to recom- 
pense is in fact on a par with the money-lender's claim to 
interest, and pure money interest being due, as we have 
found, to the operation of the impersonal money monopoly, 
pure capital interest must be traced to the same origin (348). 

The processes of exchange, absolutely necessary to the 
modern processes of production, are hampered by legal ob- 
stacles, which the services of the money-lender and of the 
capitalist help to overcome. So long as these legal obstacles 
exist, and only so long, do the money-lender and the capitalist 
render a service for which there accrues to them an income 
not earned by them, but gained for them through the com- 
plex workings of the existing monetary system. 

266. Abundance of Real Capital. — While the inadequacy 
of capital to employ labor at its maximum efficiency is that 
which accounts for the power of active capital to bring a 
revenue, this inadequacy is in striking contrast with the 
fact that the products of labor from which capital can be 
aggregated are so plentifully offered in the market that the 
difficulty of finding purchasers for them is commonly ascribed 
to ''overproduction" (241) and that the opening of new 
markets for surplus products is regarded as essential to 
national prosperity. Moreover, unemployed labor, able and 
willing to produce still more, is so abundant that the problem 
of providing employment for idle workmen is forcing itself 
upon the attention of the whole world. Insurance against 
unemployment has not only been proposed, but in some 
countries has been actually put into practice. What is it 
that prevents the surplus of goods in the market, and the 



266] MONOPOLY THEORY OF INTEREST 357 

labor crying for employment, from being utilized to supply 
the deficiency of capital? What else than the inadequacy of 
the medium of exchange, without which neither the capital 
goods already produced, nor the labor with which to produce 
more, can be made available in the process of production. 

The most convincing proof of the superabundance of ex- 
isting capital goods is the universal willingness of their 
owners to give them up in return for money. In selling things 
for the credit instrument money, the producers part with 
present goods in exchange for a right to obtain goods in the 
future, and for this virtual loan of material wealth the holder 
of the right receives no interest. The total amount of actual 
wealth so loaned without interest by the community equals 
the volume of all money in use, and that the members of the 
community are willing to lend out still more wealth on the 
same terms is shown by the eagerness of manufacturers and 
merchants to give up their goods for money, and by their 
endeavors to find new markets. 

Those who really receive interest, the lenders of money, 
are not lenders of capital goods when they lend money. They 
only give credit in the form of money in exchange for an 
equivalent credit in the form of the borrower's security, the 
only difference being that the latter, though equal in value to 
the former, is disqualified by law from being used as a medium 
of exchange. These facts clearly show that it is not the real 
capital, the goods already produced by labor, but the medium 
of exchange, which is scarce, and that money interest is not 
paid for the giving up of present in return for future goods, 
but for the loan of an instrument which is privileged to 
effect exchanges. 

It is an error to assume that the lender of money sur- 
renders capital to the borrower; it is an error to say that 
the lender of money practises "abstinence" or "waiting," or 
that he agrees to take "future goods" in return for "present 
goods. ' ' There is a flaw in this reasoning, for if the lender has 
given present goods in return for future goods, he has done 
so when he acquired the money in the process of selling his 
goods, and if there were really an economic force which tends 



358 RESTRAINTS ON INDUSTRY [267 

to accord a recompense to him who gives present goods in 
exchange for future goods, the owner of money should and 
would obtain interest until he gets the goods to which he is 
entitled in exchange for the money. 

The current academic explanations of interest which as- 
sume, directly or indirectly, a scarcity of capital, fail for 
two reasons. In the first place, it is not true that there is a 
scarcity of capital goods, the fact being that such goods can 
be obtained in abundance without the payment of interest in 
exchange for mere evidences of debt, provided only that these 
evidences are acceptable as a medium of exchange. In the 
second place, the lending of money is not a lending of goods, 
but merely an exchange of a credit which is qualified by law 
or convention to circulate as money for a credit which is 
not so qualified. 

267. Summary. — Our investigation has now led us to an 
understanding of how and why the net income from pro- 
duction is divided into wages and capital profits, the latter 
comprising rent, capital interest and money interest. We 
have also found why it is that the rate of interest on money, 
the rate of profits afforded by land and the rate of gains 
returned by invested capital are practically equal (131, 185, 
258). That the three forms of capital are competitively 
related has thus been fully demonstrated. 

At an earlier stage of our investigation (155), when con- 
sidering the division of the net income of productive groups 
into wages and profits, we had before us nothing that would 
indicate whether labor or capital has the prior claim. The 
data requisite for a complete answer to this question are 
however now fully before us. 

Production being effected by the co-operation of various 
specialized groups, the revenue derived from the sale of the 
finished products has first to be divided among these groups. 
This division is made through the payments for raw materials, 
means of production and other services bought by each group 
from its predecessors. That this sharing is governed by 
competition has been fully shown (153). 



267] MONOPOLY THEORY OF INTEREST 359 

The part which is retained by each group, namely, its net 
income, measures in the average the value of the services 
rendered by all its various participants, and this value is 
shared among them. 

Dealing with averages, we may distinguish three prin- 
cipal shares, namely, wages for work done, rent for the use 
of the land, and capital interest, the whole or part of which 
may take the form of money interest, if the capital goods used 
by the group are wholly or in part bought with borrowed 
money. 

The division is determined by certain economic forces, but 
it is clear that only two shares require specific determination, 
the remainder making up the third share. 

The first part segregated from the total is rent. The 
operation of the economic forces through which rent accrues 
to the owner of the land has been sufficiently discussed before 
(170-180). In regarding the sum total Oq of a given kind 
of products that is brought to a given market. Fig. 20 repre- 
sents the process of the division, which is determined by two 
primary factors. One of them comprises the various natural 
qualities of all the land used for the purpose, as they affect 
the effort required for the production of the different ele- 
ments making up the supply. They find expression in the 
supply curve 88'. The other comprises the aggregate of 
those conditions which govern the demand and which are 
represented by the demand curve DD'. The margin of cul- 
tivation becomes located at the intersection a, the ordinate qa 
of which determines the price of the product. The total 
product having a market value represented by the area Oqap, 
and the cost of producing it being represented by the area 
0qa8, the rent which accrues to the owners of the land utilized 
is proportionate to the area 8ap. 

The share of the net income which accrues to the capitalist 
and the money-lender combined depends upon the current 
rate of interest and on the amount of capital that can be 
employed advantageously. Both these factors are determined 
in their own way. How the rate of interest is dependent on 
the balance of the two currents E and 8, Fig. 25, flowing be- 



360 RESTRAINTS ON INDUSTRY [267 

tween the financial and the industrial field, and representing 
expenditures and savings respectively, has been fully shown 
and formulated in the equations (5) and (6) (252), and how 
the interest rate determines the amount of capital that can 
be employed advantageously has likewise been pointed out 
(158). The share going to capital and money combined is 
equal to the product of the above amount of capital mul- 
tiplied by the interest rate. 

The share going to labor as wages is reaUy determined at 
the margin of the employment of capital, namely, where all 
capital goods needed are obtained through borrowed money. 
The share going to land as rent and that going to money as in- 
terest being predetermined, the amount going to labor as 
wages is the residual share of the group's net income. The 
intra-marginal capitalist purchases labor at the same price 
as that which labor commands at this margin, and, after pay- 
ing rent and wages, he retains as income an amount equal to 
the money interest paid by the marginal capitalist, and this 
income is capital interest. It would appear from this that 
capital interest is the final residual share, but since capital 
interest equals the money interest paid by the marginal 
capitalist to the lender of money, it is really, like money in- 
terest, a predetermined share. Labor cannot employ itself 
without the use of land and cannot therefore shirk the pay- 
ment of rent. Nor can it make itself independent of the 
charges for the use of capital so long as the means of exchange 
command an item of pure interest. Labor must therefore 
take what is left after rent and interest are paid. 

Our investigation has also laid bare the source and the 
nature of the peculiar power which money possesses under 
existing conditions. Under these conditions money possesses 
two distinct capacities, only one of which is inherent and 
essential, while the other is extraneous and unessential. Each 
of these faculties is due to a separate and independent cause. 

In the first place, money has capacity as a medium of 
exchange. This faculty is imparted to it by the social com- 
pact through which coined gold and certain credits acquire 
current acceptability in the market. Through the use of this 



267] MONOPOLY THEORY OF INTEREST 361 

capacity producers are enabled to specialize their work and to 
employ the best methods of production. But in this capacity 
money merely facilitates exchanges, and since products do 
not increase in value merely through being exchanged, the 
use of money as a medium of exchange cannot afford either 
profit or revenue (134). In this capacity, therefore, money 
cannot be classed as capital (129). 

But, as stated above, money possesses another capacity, 
namely that of commanding a revenue when loaned. It is 
only through lending that money develops a power character- 
istic of capital. This power becomes attached to money 
through the operation of legal hindrances to the free use of 
secured credit as a medium of exchange and is aecordinglj'' 
extraneous to the essential function of money, being imparted 
to it through the operation of an impersonal monopoly (259- 
261). 

We must, however, avoid the error of charging these con- 
ditions to machinations of any special class of the community. 
Although we have found that interest is not really earned 
by the owners of either money or capital, these latter cannot 
be justly accused of acquiring it by nefarious or by coercive 
means. They are no more responsible for the existing con- 
ditions than the victims of the system (336), 

It may be in order to reiterate that it is only the unearned 
portion of gross interest which is here in question. That 
portion of the current interest which compensates the lender 
for personal services and covers the risk entailed is, of course, 
altogether reasonable and just. What we have yet to learn is 
how money can be deprived of its present power to command 
a return exceeding the value of the services rendered by the 
lender. This cannot be done by legal limitation of the rate 
of interest, as is abundantly shown by experience. But it can 
be done by doing away with the legal limitation of the use 
of credit as a medium of exchange which prevents the supply 
of money from meeting the demand. A practicable method 
to this end will be elaborated in a later chapter. 



CHAPTER XV 

BUSINESS STAGNATION 

268. Involuntary Idleness. — As stated at the begmning, 
the present inquiry was started for the purpose of discovering, 
if possible, the cause or causes of financial crises and of the 
recurring periods of business stagnation. In the light of our 
preceding investigation this question finds a conclusive 
answer. A few additional deductions from the data at hand 
will bring us to an understanding of why it is that the proc- 
esses of production and exchange are subject to periodical dis- 
turbances, and why it is that in times of business stagnation 
the pressing demand by unemployed workers for the means 
of livelihood is not supplied in spite of their readiness to give 
their labor in exchange. This labor could collectively produce 
the very things which the idle workers need, yet, through some 
cause they seek employment in vain, while others remain but 
partially employed. This condition cannot be ascribed to any 
lack of natural resources, for there is land in plenty from 
which to obtain the raw products that need only be worked 
into the things required. It cannot be attributed to a scarcity 
of industrial and commercial facilities, for in times of busi- 
ness depression the means of production and transportation 
are in part idle, and their owners are constantly on the look- 
out to put them to use. Nor can it be said that energy and 
enterprise are wanting, for everywhere both employers and 
workmen are anxious to resume work. It is manifest that 
these conditions are not inherent in the nature of things, 
but that they result from some existing defects in the existing 
economic system which cannot but be susceptible of correction 
in some practicable way. 

269. Excess of Supply Over Demand. — The most con- 
spicuous feature of business stagnation is the excess of the 
supply of labor and its products over the effective demand 
for them. This would appear to conflict with the well recog- 

362 



270] BUSINESS STAGNATION 363 

nized fact that the supply of any one thing in the market 
constitutes a demand for some other thing of equal value, and 
that for this reason the total of all supply and the total of 
all demand are always equal (34). But it must be remem- 
bered that this is true only of the sum total of supply and 
demand, and is not necessarily true as regards the supply and 
demand of particular commodities or services. It simply 
means that if at any time there is an excess of the supply of 
some goods or services in the market, this inequality is neces- 
sarily balanced by an equal deficiency of the supply in some 
other direction. 

But even this does not seem to be borne out in the actual 
business world. It is the universal experience that there are 
times when all kinds of goods and services are offered in the 
market in excess of the effective demand. At such times there 
are workers in practically every branch of industry who seek 
employment in vain and producers in practically every line 
whose goods accumulate in the market because of a general 
lack of effective demand. 

If it is indeed a fact that total supply and total demand 
are necessarily equal, it must be possible to point out some 
product of which the supply is less than the demand during 
those periods in which the supply of both labor and mer- 
chandise generally is greater than the demand. 

270. Insufficient Supply of Money the Cause. — Since 
practically all exchanges are mediated through money, each 
offer of goods or services primarily constitutes a demand for 
money, and it follows that if the supply of this medium is 
deficient, the demand for things and services offered for 
money is correspondingly deficient. The general oversupply 
of things and services offered for exchange can be accounted 
for only hy an equal under-supply of the medium of exchange. 
In our preceding investigation we have found that there is 
actually an under-supply of the medium of exchange (238), 
and that this condition imparts to both money and capital 
goods the power to command an unearned income. The 
arbitrary co-ntrol of the volume of currency, accordingly, is 



364 RESTRAINTS ON INDUSTRY [270 

not only the cause of the predatory power of wealth, hut also 
the cause of industrial stagnation. 

In the equation of monetary circulation (119) 

the letter K represents the yearly traffic of goods and services, 
and the product £^ X -P is the same traffic expressed in terms 
of dollars. The monetary flow V X B measures the volume of 
money payments. If, then, by an undue limitation of the 
volume V this flow is constrained, the volume of exchanges is 
thereby correspondingly restricted. This demonstrates what 
has been stated above, that stagnation of business with its 
coincident lack of employment is due to the inadequacy of the 
medium of exchange (121, 262). 

This explanation of the lack of employment has often been 
advanced, but has been persistently rejected by many econo- 
mists, principally for the following reason. 

It is known that periods of business stagnation alternate 
with periods of business activity, though the volume of money 
is practically the same during both periods. If it is sufficient 
during prosperous periods, why should it not also suffice dur- 
ing times when business is depressed ? Indeed, during periods 
of protracted business stagnation money accumulates in banks 
and is offered for loan at reduced rates of interest. This 
fact is generally held to indicate that we are actually suffer- 
ing from a plethora of money. Let us examine how far this 
argument is valid. 

When a steady wind blows against a tree, it alternately 
bends down and rises up again, swaying to and fro. When 
bent down as far as it will go, it remains for a moment almost 
stationary before it rises again, and after assuming its upright 
position, it remains practically upright for a second or so 
before bending down again. 

But who would construe these facts as demonstrating that 
the swaying of the tree cannot be caused by the wind, on the 
ground that if the tree can maintain an upright position for 
a moment in the face of the wind, this wind cannot be re- 
garded as the cause of the bent position of the tree at another 



270] BUSINESS STAGNATION 365 

moment. Yet, this is in substance the contention of those who 
insist that the accumulation in banks during periods of busi- 
ness stagnation is proof that there is not only an abundance, 
but even a plethora of money, and that accordingly the re- 
curring periods of business stagnation cannot be due to an 
insufficient volume of currency. As a matter of fact, the 
obstructions placed in the way of freedom of exchange by our 
currency laws are the cause not only of a holding back of the 
processes of production and exchange, but also of the alterna- 
tions of periods of depression with periods of prosperity, just 
as the action of the wind really causes the bending and 
alternate swaying of the tree. 

If the tree were absolutely rigid, if the element of elasticity 
were totally absent, the wind could not possibly sway it. It 
would resist the wind until the force increases to the point of 
breaking. Some reactive force like that of elasticity which 
increases as the tree is bent, or like that of gravity which acts 
on an increasing leverage as a pendulum swings from its 
central position, must be present in order to bring about 
alternation of movement. 

That such a factor is present in the existing conditions of 
commerce and industry can easily be shown. The element of 
credit is to business conditions what elasticity is to the tree. 
It is through the system of credit that debts accumulate and 
exert an increasing pressure upon business conditions 
generally. 

A community can be imagined in which commercial credit 
is unknown. Its money would consist of a standard com- 
modity exclusively; every purchase would immediately be 
settled by the payment of money ; there would be no debts, 
no lending of money. If under these conditions the volume 
of money were inadequate to mediate all those exchanges which 
would be required in order to keep all workers fully employed, 
the industrial flow would correspondingly be restricted. An 
unvarying amount of unemployed labor, a practically uniform 
degree of ''lack of work," would prevail in this community. 
The extremes of prosperous and dull times would never be 



366 RESTRAINTS ON INDUSTRY [270 

observed. Crises would never occur. The equation of 
monetary circulation 

KXP^VXB 

would be constantly satisfied. 

But credit, as a factor of our commercial system, permits a 
departure from this uniform state of things. The industrial flow 
K X P may for a time exceed the compensating monetary flow 
y X -K, and during this time the inadequacy of the volume V 
cannot manifest itself as an obstruction. Since the delivery 
of goods is not at once followed by payment, the above equa- 
tion is not applicable to definite periods (120) and should be 
modified. 

If B is the sum of business debts and dB is the differential, 
that is, the increase of these debts within a given period,®® 
the equation should be written (245, 272) : 

EXP=VXR + dB. 

"While business is prosperous and the industrial flow KX P 
exceeds the monetary flow V X K, credit is freely extended 
and business debts gradually increase. But ere long pay- 
ments are more and more postponed, collections become slower 
and slower, and increasingly long credits are demanded on 
every side (273). The monetary flow is inadequate to fully 
balance the industrial flow (291), but for a time the inevitable 
result is staved off. 

So, too, those currents which make up the barren circula- 
tion of money do not balance. As long as the flow /, Fig. 25, 
exceeds the difference E — 8, a reactive force, like that of the 
elastic force of the bending tree, will develop in the form of 
increasing money debts, and since these debts cannot in- 
definitely increase, a reaction must finally set in. The period 
of increasing debt and the period of inevitable reaction 
alternate like the oscillations of the tree, these changes taking 
the form of recurring business fluctuations. But let us look 
more closely into the details of this process. 

'" If business debts should decrease during any period, the differ- 
ential dB becomes, of course, a negative quantity. 



271. 272J BUSINESS STAGNATION 367 

271. The Cycle of Industrial Activity."*' — In our eon- 
elusions regarding the law of interest (251) we limited our 
considerations principally to long periods of time, taking no 
account of fluctuations from the average. We reasoned from 
the formula : 

(4) I = E — 8, 

which is wholly valid only with reference to average con- 
ditions. But when we come to study periodic changes, we 
cannot ignore the quantities dD and dV and must therefore 
have recourse to the strictly correct formula : 

(3) I = E — S-{-dD — dV, 

The differential quantities dD and dV nave a distinct 
significance in the cycle of industrial activity. In this cycle 
there can be distinguished four periods, according as the 
predominating features are successively (1) a positive dD, 
(2) a negative dV, (3) a negative dD, and (4) a positive dV; 
or, to put it in ordinary phrase, first, an increasing volume of 
of loan debts, attended, as we have seen before, by a similar 
increase of business debts; second, a decreasing volume of 
active funds ; third, a decreasing volume of debts ; and fourth, 
an increasing volume of active funds. In the first and second 
periods the flow I exceeds the difii'erence E — 8 ot the prepara- 
tory currents, in other words, the total net interest received 
by the financial class is more than their net expenditures. In 
the third and fourth periods the reverse is the ease. As a 
rule these periods merge gradually into each other. Only 
exceptionally can a rapid change from one to the other be 
observed. In Fig. 26 in which the line DD represents the 
varying volume of loan debts, and the line VV the varying 
volume of money in actual use, this cycle is graphically 
depicted. 

272. First Period. — In times of industrial activity, when 
business is "brisk," all industries are fully employed and 
goods are sold as rapidly as they can be made. The industrial 

*"" See footnote No. 94, paragraph 245. 



368 RESTRAINTS ON INDUSTRY [272 

flow is at its height. Though all available money is drawn into 
circulation and the rapidity of circulation is greater than at 
any other time, yet the monetary flow T X -K does not keep 
pace with the industrial flow EXP (119), and the active 
demand for money finds expression in a high rate of interest. 
In the above equation (270) the differential dB is accord- 
ingly a positive quantity, which means that business debts are 
on the increase. But just as the resistance of the swaying 
tree against the wind, when it begins an oscillation downward, 
is at first but slight, so is the effect of accumulating business 
debts upon industry and commerce at first but imperceptible. 

Meanwhile debts for money loans are also increasing, and 
interest payments likewise. The current I now exceeds the 
difference E — S (251), and therefore the balance of the 
three currents I, E and ;S^ of Fig. 25 is in favor of the passive 
funds. This excess is returned into the field of active funds 
through the loan channel L, hence that current exceeds the 
sum of the currents P and B. The volume V is not reduced, 
despite the excess of I over E — >8', but this excess, being 
added to the current L, causes an increase of the volume of 
loan debts, an increase of the indebtedness of the business 
world to the financial world. 

At this stage three factors come into play which hasten 
the coming reaction. First, the prices of both goods and labor 
go up, and the corresponding rise of the price level P swells 
the excess of the flow K X P over the flow V X R- At this 
higher price level the capacity of money to perform its work 
as a medium of exchange is reduced, hence the same amount 
of money can no longer compass the same volume of traffic. 
Second, through steady employment wage-earners are enabled 
to lay aside more of their earnings than before. An increas- 
ing fraction of the total money is being withheld from circu- 
lation, and the current 8, Fig. 25, is increased. Third, bor- 
rowers of money reach the limit of their credit, and the pay- 
ments of business debts become increasingly deferred. The 
excess of I over E — >S' is no longer fully restored to circula- 
tion, hence the volume of active funds begins to shrink. Thus 
the first period of the cycle, characterized by an increasing 



273] BUSINESS STAGNATION 369 

indebtedness, a practically stationary voiume of active funds 
and an excess of the current / over the difference E — 8, 
gradually merges into the second period, characterized by a 
steady diminution of the volume of active funds. 

273. Second Period. — The difficulty experienced in col- 
lecting outstanding accounts now increases, as the monetary 
flow lags more and more behind the industrial flow of goods 
(270). Payments are received more slowly than counted 
upon; the risks of selling on credit become more and more 
marked. Lack of funds on the one hand, and considerations 
of safety on the other, now compel retrenchment. Prepara- 
tions made for a continuous and increasing run of business 
activity now become unavailing, and business failures in- 
crease in number. Money has become 'Hight" and is held 
back for possible emergencies. Hoarding becomes a common 
practice (282, 303), and less money is brought to the banks, 
hence bank reserves diminish. The dearth of money becomes 
acute, and the unusual demand for gold, the only medium 
through which the shrinking bank reserves can be replenished, 
causes its value to rise, and in consequence prices tend to 
^0 down (345). Since banks are constrained to curtail loans 
and to call in or reduce those already granted (277), the 
volume of that part of the medium of exchange which consists 
of bank credit is contracted (281). A financial panic is 
imminent. The swaying tree has bent before the wind to its 
lowest position and its resistance is strained to the utmost. 

At this stage of the cycle the financial conditions in the 
United States present a feature which, by reason of the ex- 
tensive use of bank credit as a means of payment, is peculiar 
to this country. Over two-thirds of the available means of 
exchange normally consist of bank credit which has but a 
limited range of circulation. Only about one-third, or even 
less, of the means of payment consists of currency which is 
adapted to pass from hand to hand, and the money which is 
withheld from the banks by hoarding is taken exclusively 
from this latter portion. The banks receive too little cur- 
rency to meet their requirements. They are therefore unable 
to furnish currency as it may be called for by depositors, 
24 



370 RESTRAINTS ON INDUSTRY [274 

and these are accordingly unable to make payments requiring 
currency. At such a juncture even wages have largely to be 
paid by check. To meet the emergency as it develops in the 
great centres of exchange, recourse is taken to extraordinary 
means of filling the gap in the means of payment, by creating 
the medium of exchange known as ** clearing house certifi- 
cates." In countries where payment by check is not so 
prevalent as in the United States, financial crises do not take 
the acute form of a marked disappearance of currency from 
circulation. 

The distinctive features of this second period of the cycle 
are a practically stationary volume of loan debts, since bank 
reserves are at a minimum; and a diminishing volume of 
active funds, resulting from an overbalance of the currents 
that flow out from the active into the passive field, accent- 
uated in the early stages of the period by a general 
tendency to hold on to money in apprehension of its increas- 
ing scarcity. The quantity dD is practically nil, dV is 
negative and I still exceeds E — ;8^. 

274. Third Period. — Owing to the lack of money in the 
active field and the consequent stagnation in business, many 
debtors are unable to meet their obligations, and the third 
period is ushered in. Business men who can do so pay off 
at least part of their loan debts, since a smaller working 
capital suffices for the reduced volume of business. But the 
sum total of collectible debts is furthermore reduced by reason 
of business failures which at this period become increasingly 
numerous, and since for this reason a greater portion of the 
gross interest goes to cover losses, that portion of the re- 
mainder which constitutes pure interest is materially reduced 
^(256). This is the typical period of business depression with 
its widespread business disasters and the prevailing stagnation 
of industry and commerce. It has been currently but errone- 
ously assumed that these conditions are but a manifestation 
of the process of "weeding out financially weak business con- 
cerns" and putting a stop to "heedless overproduction of 
things. ' ' 



275] BUSINESS STAGNATION 371 

The economic law expressed by the formula: 

I = E — S, 

which we have found to mean that the net income I from 
money loans cannot indefinitely exceed the net expenditures 
E — S of. the lenders (251) now asserts itself. The sum of 
net interest on loans falls below the net expenditures of the 
lenders to the extent to which it formerly exceeded the latter. 
Money is now freely offered for loan on approved security at 
low rates of interest, but would-be borrowers who are already 
deeply indebted cannot give acceptable security for further 
loans, and the possessors of good security who have but few 
or no debts have no need to borrow for the purpose of pay- 
ment, and no occasion to borrow for the purpose of increasing 
business facilities which are already more than adequate under 
the existing conditions. Money accumulates in hanks, which 
would seem to indicate that it is not needed in business. This 
accumulation is often adduced as proving that there is a 
plethora of money, while in reality it is a natural and inevit- 
able result of excessive interest rates due to the insufficiency 
of money. 

The features of this, the third period, are a diminishing 
volume of debts, in part due to the many failures by which 
debts become invalid and must be charged to loss, a small 
volume of active funds, an accumulation of money in banks, 
and a low rate of net interest, so low, indeed, that it is in- 
sufficient to cover the expenditures E of lenders, while the 
current 8 shrinks to almost nothing. The current I is now 
less than the difference E — S. 

275. Fourth Period. — Finally the third period of this 
business fluctuation merges into the fourth, as the money 
in the active field slowly increases by reason of the excess of 
E over 7. The differential dV is positive, and this leads to a 
gradual recovery. The net income I of lenders is still low, 
principally for two reasons. In the first place, most of the 
remaining debts have been renewed at a lower rate of interest 
and, in the second place, the volume of indebtedness is at an 
ebb, while, at the same time, business is so dull that those 



372 RESTRAINTS ON INDUSTRY [276 

who are in position to borrow money have no inducement to 
do so. By the excess of the current E over the currents / and 
8 of Fig. 25 the passive funds are finally, though slowlj'', 
restored to activity. It should be remembered that the current 
E includes not only the expenditures of passive funds for 
personal use, but also their investment in industrial enter- 
prises (249). The money that has accumulated through the 
current I is now being put out in *' reorganizing" business con- 
cerns that had become ' ' embarrassed, ' ' in starting anew enter- 
prises that had been halted and in investments in new under- 
takings. It is by this process that the ownership of all larger 
industries is being gradually acquired by the "Napoleons of 
Finance." We shall hereafter have more to say on this 
feature of our industrial system (338). 

In this period the volume D of debts is low and prac- 
tically stationary, but the volume V increases, as indicated in 
Fig. 26, while the current / remains less than E — 8. 

276. Succession of Cause and Effect. — In the foregoing 
presentation of the cycle of industrial activity we have found 
an explanation of all the developments of the successive periods 
by tracing their causal relations. The characteristic features 
of each period result from those of the preceding one and 
become in their turn the immediate causes of those of the 
succeeding period. 

The underlying cause of this succession of events is me 
need of the business world for a medium of exchange coming 
in conflict with the forces that constrain the supply. Money 
thereby obtains the power to command pure interest which 
gives preponderancy to the monetary flow from the active to 
the passive field. In the first period the money so withdrawn 
from circulation is restored to activity through loans, entailing 
an increase of the volume of loan debts. In the second period 
the volume of debts has grown to a point beyond which they 
cannot increase, and the industrial field becomes depleted of 
money through the interest flow being no longer returned 
through loans. This leads to the third period, a time of general 
stagnation of business, of business failures (240) and of 
reduced interest rates. And this is followed by a reaction 
which starts the fourth period, a time of readjustment, charae- 



277j BUSINESS STAGNATION 373 

terized principally by a gradual restoration of the locked-up 
currency to circulation. 

Cause and effect are thus seen to follow in their natural 
sequence, in a cycle of four periods. In actual affairs, to be 
sure, the successive periods do not follow each other as rhyth- 
mically as plotted in the diagram Fig. 26. The ramifications 
of business are such that at times the extent of fluctuation is 
less than at others, the interval between extremes being then 
marked by minor disturbances, just as in a stormy sea the 
depression between two high waves is marked by smaller ones. 

277. Current Explanations of Business Stagnation. — 
Various theories have been advanced by writers on economics 
and are constantly echoed by the periodical press, to explain 
the phenomenon of business stagnation. Financial crises are 
usually attributed to causes within the control of individuals, 
such as reckless or even dishonest pursuit of gain, to mis- 
direction of large industrial enterprises, to designedly corner- 
ing the money market, and so forth. Our investigation points 
indeed to an enforced constriction of the currency, effected, 
however, not through a scheming by financiers supposed to 
have control of the money market, but through the operation 
of our currency and banking laws. These laws have per- 
sistently been framed in the light of the supposition that the 
volume of the medium of exchange must be guarded against 
so-called inflation; and the fear of ''inflation" is born of a 
theory which, unfortunately, has too long been prevalent, 
principally by reason of the support given to it through incor- 
rect reasoning by academic authorities. 

There is a widespread disposition to blame ''speculation" 
for industrial disturbances, and since this term is largely 
applied to transactions which are really nothing but gambling 
and which are therefore popularly condemned^ this explana- 
tion, though incorrect, is apt to pass unchallenged. 

Stock speculation has much the same kind of attraction as 
all other forms of gambling. The prospect of gain by a lucky 
venture is so alluring that the chances of loss are disregarded, 
and hazards of this nature are often carried to a point where 
the gambler is finally engulfed in ruin. But there is no reason 



374 RESTRAINTS ON INDUSTRY [278 

whatever why this should lead to general disaster. No actual 
wealth is either gained or lost by the community as a result 
of such ventures. Some people thereby become richer, others 
poorer (216), and since no one can foresee the future, no one 
can have more than a temporary advantage over others in the 
field of speculation, except where the "insiders" are playing 
the game with loaded dice. An industrial depression of a 
general nature cannot result from this cause. 

The widespread belief that stock speculation is one of the 
causes of financial crises is strengthened by the fact that such 
crises are invariably attended by a general fall in the value 
of stocks. But this can readily be explained. When in the 
second period of the cycle of business fluctuation (273) the 
banks are obliged to call in loans, those debtors who possess 
stocks or bonds find these assets most easily marketable for 
paying off their loans, and such certificates of value being put 
upon the market in unusual amounts, their value naturally 
declines. A break in the value of stocks is therefore often a 
first indication, but not a cause of the coming storm, the real 
cause being the accumulated overwhelming indebtedness of 
the business world. 

278. Over-trading. — The impulse to speculate finds ex- 
pression in various ways. Instead of gambling in stocks, 
business men may, in a purely speculative spirit, buy goods in 
expectation of a rise in the market. Crises have often been 
ascribed to the failure of such expectations, as may be seen 
from the following condensed abstract from John Stuart Mill : 

When there is a general impression that the price of some 
commodity is likely to rise, there is a disposition among dealers 
to increase their stock of goods in order to profit by the expected 
rise. This disposition tends in itself to produce a rise of price. 
Other speculators are attracted who, by further purchases, pro- 
duce a further advance. After a time the price ceases to rise 
and the dealers, thinking it time to realize their gains, are 
anxious to sell. The price begins to decline, the dealers rush 
into the market to avoid a still greater loss, and finding but 
few purchasers willing to buy in a falling market, the price 
falls much more suddenly than it rose. 

In a community in which credit was unknown, this will be 



278] BUSINESS STAGNATION 375 

confined to one or a few commodities. But when people go 
into the market and purchase with the money they hope to 
receive hereafter, this form of speculation may be going on in 
all commodities at once. All prices will then rise enormously 
by the mere extension of purchases on book credits. After a 
time those who had bought would wish to sell and prices would 
collapse, thus bringing about a commercial crisis.^"^ 

This argument is founded on unwarranted assumptions. 
A rising or falling of market values cannot as a rule be fore- 
seen. But even if there are reasons to expect the price of 
some goods to rise, and these reasons are generally known, 
those who have such goods for sale will not sell unless they 
get a price that includes the expected increase. Hence a gen- 
eral rush to buy in a rising market will at once be checked by 
an increase of the price. To be sure, it may happen that some 
individuals gain insight into causes that may affect prices be- 
fore others do, and may use this insight to reap speculative 
gains, but since, in the nature of things, these happenings are 
but of comparatively rare occurrence and may be on the side 
of either buyer or seller, their influence on general business 
conditions is negligible. 

But even if a rise in price had induced dealers to lay in a 
large stock of the goods, there is no reason to assume that the 
first manifestation of a decline in prices would cause a rush 
to sell, such as described by Mill. Prices in general are known 
to be subject to irregular minor fluctuations (60), hence a 
turn in the movement of prices is never accepted as certain 
indication of a continued advance or decline. The conclusion 
that a first indication of a fall in prices will frighten the 
holders of the goods into selling and will keep people from 
buying, thus causing a collapse, does not agree with observed 
conditions. In point of fact, a demoralized market is one of 
the incidents and not the cause of commercial crises. 

Although a rising or falling of market prices can be fore- 
seen only in sporadic instances, theories have nevertheless been 
elaborated regarding the effect of a rising or a falling market 
on the state of business, on the current rate of interest, on the 

^''^C/. Mill, II, pp. 67 ft. 



376 RESTRAINTS ON INDUSTRY [279 

stock market and on other economic conditions. Theories of 
this kind are applicable to such cases only where a continued 
rise or fall can be foreseen with tolerable certainty, as for 
example to land values. How the expected annual increment 
affects the value of land has been fully discussed (183) and 
will be the subject of further consideration (327-329). As a 
special exception to the rule that an impending change of 
prices cannot be foreseen may be mentioned the peculiar con- 
ditions prevailing during the time following the passage of 
the law, in 1875, providing that specie payment should be 
resumed on the first of January, 1879. During the interven- 
ing period the value of the dollar was predetermined to rise 
from its depreciated level to parity with gold, and a general 
fall of prices, as measured in the current dollar, could accord- 
ingly be foretold. In this extraordinary instance the cer- 
tainty of a continued fall of prices was presumably responsible 
for the prolongation of the business depression throughout 
that period. 

279. Improvident Investments. — Somewhat more plausi- 
ble than the attempted explanation just discussed is that 
which attributes stagnation of industry to the investment of 
large amounts of capital in undertakings, such as the building 
of railroads, which eventually turn out to be unremunerative. 

Similar in purport is the proposition that crises result 
from an ' ' undue conversion of floating into fixed capital. ' ' ^°- 
This statement can have reference only to the investment of 
money in some form of enterprise, and since money, whether 
in the form of currency or of bank credit, when invested, 
simply changes hands and does not disappear from the com- 
munity, this "undue conversion" can only be understood as 
meaning that too much money has been spent on the pro- 
duction of fixed capital, in other words, that too much effort 
has been diverted from the production of consumable things 
to that of means of further production, and that this "fixed" 
capital turns out to be less remunerative than expected. 

In order to account for business stagnation on this ground 
it would be necessary to assume that the extent of ill-directed 

^"'Cf. Walker, p. 473; MacLeod, I, p. 214; et al. 



280] BUSINESS STAGNATION 377 

investments fluctuates in more or less regularly successive 
periods. But even conceding this assumption, the suggested 
explanation would not account for the phenomenon. Even 
though expectations that the products or services to be 
rendered through the investments would find a profitable 
market are not realized; even though the capital so "fixed" 
proves unremunerative or a total loss ; why should this cause 
a general stagnation of business and a paralysis of enterprise ? 
The owners of the capital that has been misapplied have 
simply lost a part or the whole of it and are that much poorer 
for their venture. To some extent this loss may spread beyond 
the immediate losers and may be shifted upon others. But all 
this affords no reason why production and exchange in general 
should be arrested in their course. The fact that some energy 
has been wasted is no cause for the paralysis of energy in 
general. It is manifest that this affords no explanation for 
business depressions. 

280. Undue Expansion of Credit. — An approach to the 
true explanation of commercial crises is the theory which 
attributes these disturbances to an undue expansion of credit. 
It is accepted by many writers on the subject and is formulated 
by Perry as follows : 

The cause of commercial crises is, in general, an undue expansion 
of credit J or, to use an equivalent expression, a disproportion between 
the amount of debts and the available capital in the loan-market, or 
elsewhere, to meet those debts."^ 

But this explanation is vague. In order distinctly to ex- 
press the condition, the statement should read that there is a 
disproportion between the amount of debts and the available 
means of payment to meet these debts. Where Perry fails, as 
do all others of his school, is to explain how this "undue ex- 
pansion of credit" comes about, for it is in this direction that 
the real cause of commercial crises is to be looked for. The 
fact is that bank currency and bank credit, making up to- 
gether the indispensable medium of commercial exchange, are 
put into circulation almost entirely through the process of 
lending, and so long as the borrower must pay interest at a 

10s Perry, p. 334. 



378 RESTRAINTS ON INDUSTRY [28i. 282 

rate which includes a toll in addition to due compensation for 
the work and the risk of the lender, the debts which are con- 
tracted in the process of issuing currency and bank credit, 
namely the debts of the industrial to the financial class, must 
constantly increase, which means that the debtors as a class 
are thereby compelled to *'an undue expansion of credit" to 
such an extent as must inevitably result in an overwhelming 
** disproportion between the amount of debts and the available 
'capital' " with which to pay them (255). 

281. Loss of Confidence. — Another widely accepted ex- 
planation of business depressions is that which attributes them 
to a general loss of confidence. Loss of confidence in what? 
Evidently in the ability of debtors to pay their debts or in the 
likelihood of business continuing to pay. But why this loss of 
confidence? Evidently because debts have grown, payments 
are put off and orders are getting less. The bare statement that 
confidence has been lost is not an explanation, inasmuch as 
the reason why confidence has been lost remains to be explained. 

Quite often the explanation is sought in a general shrink- 
age of credit. What credit? The wealth in existence, the 
very basis of credit, has not shrunken, but, on the contrary, 
has been steadily increasing during the period of prosperity 
preceding a commercial crisis, and is at a maximum at that 
very juncture. The phrase is obviously meaningless, unless 
"credit" is to be understood in the sense of monetized credit, 
in other words, money. What really takes place and is 
erroneously regarded as a "shrinkage of credit" is, in the 
first place, the growth of indebtedness beyond the means of 
payment (255), and, in the second place, a diminution of the 
means of payment through a reduction of bank credit by a 
calling in of loans (273), in other words, a reduction of the 
extent to which existing wealth is monetized (104). This is 
not a shrinkage of credit, but a demonetization of credits, and 
this, in turn, is a result of our defective and ill-considered 
currency laws. 

282. Hoarding of Money. — Considering that commercial 
crises have their primary cause in the inadequacy of the 
volume of currency, it is not surprising that one of the in- 
cidents of such disturbances, the hoarding of money, should 



283] BUSINESS STAGNATION 379 

be mistaken by many observers for the cause of the crisis in- 
stead of one of its accompaniments. That the hoarding of 
money toward the close of the second period actually plays 
a certain part in hastening the transition from the second to 
the third period of the cycle of business fluctuation has been 
shown above (273). 

When we consider that money, whether gold or paper, is 
in reality an evidence that the owner, when he obtained the 
money, gave real wealth in exchange for it, and by hoarding 
the money allows this real capital to be used without himself 
getting interest (80), the question immediately arises, why 
should the hoarding of money be deprecated, and why is it 
considered a detriment to the community ? 

It is clear that a withdrawal of money from circulation can 
be harmful to a community only if it causes such a reduction 
of the active funds as to impede the processes of active busi- 
ness. And this can come about only through the mistaken 
limitations on the issue of money imposed by our currency 
laws. 

By many it is regarded desirable that the rich should 
spend their money freely, even though extravagantly, in order 
that it be put into circulation and so "make business.'* A 
business system in which extravagant consumption of wealth 
becomes a desirable factor of business activity is manifestly 
bad. 

283. Extravagance. — If further proof were needed of the 
hopeless confusion that has arisen in the discussion of the 
causes of business disturbances than those above adduced, it 
would be afforded by the divergent opinions and conflicting 
theories on the subject of saving and spending money. It 
happens very often that those who regard the extravagant 
spending of money by the rich as being beneficial because 
money is thus brought into circulation, turn about to admonish 
wage earners to save their money, overlooking the fact that 
this very saving would in the same sense take money out of 
circulation. 

Extravagance, profligacy, intemperance and other vices 
may indeed deprive their victims of the means of support in 
time of need, but cannot result in a condition of affairs in 



380 RESTRAINTS ON INDUSTRY [284 

which production and exchange are brought to a standstill and 
in which men able and willing to work seek for emplojonent 
in vain. On the contrary, it is but too frequently true that 
the victims of business depression turn to intemperance and to 
crime as a result of their inability to honestly gain their 
livelihood. 

There is manifestly no better ground for this explanation 
of economic crises than for the various other current theories 
on the subject. These superficial explanations of business 
stagnation may be dismissed from further consideration, in- 
asmuch as the real cause of the trouble has already been 
pointed out in the course of our inquiry. 

284. Effect of Tariff on General Business Conditions. — 
The very term ''protective" tariff reflects the widespread 
notion that a high tax on imports has the effect of making it 
possible to give employment in the home market to workmen 
who otherwise would be left unemployed because of foreign 
competition. But we have already found, in the course of 
our inquiry, that the real cause of unemplojonent lies in our 
irrational currency laws, and that competition, in and for 
itself, cannot account for lack of employment. 

It cannot be denied that changes in tariff schedules have 
the effect of disturbing the existing equilibrium between the 
trades affected on the one hand and all other trades on the 
other; and, moreover, that they have an influence, one way 
or another, on the cycle of business activity. 

The high wages prevailing in this country are usually 
credited to high tariff. This, of course, can refer only to 
wages as measured in dollars and cents. It will appear later 
(353) that a tariff has also the effect of keeping the general 
price level up, or, which is the same, of keeping the purchas- 
ing power of money down. Hence such increase in wages as 
is due to tariff, while apparent in the number of dollars and 
cents, is only in a minor degree an increase of real wages 
(165). A high tariff is therefore not as much of a boon to 
labor as it would appear to be. That it is a partial palliative 
of the ill effects of our monetary system will be shown in the 
last chapter (351-353). 



PART IV 

CONCLUSIONS 



CHAPTER XVI 

CUERENCY REFORM 

285. Essentials of a Sound Currency. — In view of the 
numerous disastrous failures of currency schemes recorded in 
history, any proposal for a radical change in the existing 
currency system is generally regarded with distrust. The 
prevailing tendency is to "let well enough alone." This is 
strengthened by the widespread acceptance of the volume 
theory of the value of money, according to which any change 
in the volume of money will be balanced by an opposite change 
in the value of the unit, and can only derange the scale of 
prices, resulting in more harm than good (239). For this 
reason changes in the laws regulating the currency have been 
made only under the stress of urgent necessity, and generally 
against much opposition. 

But there is ample reason, as we have seen in the course of 
this inquiry, for a thoroughgoing reform, looking to a ma- 
terial increase in the volume of money. What is required is 
a mediiun of exchange that will be ample in quantity for all 
emergencies, and sound in quality under all conditions. "We 
have therefore to find, if possible, a practicable way of meet- 
ing these requirements. The faults of the various currency 
systems which have proved defective can be avoided by bear- 
ing constantly in mind that every piece of money is essentially 
a credit instrument, an acknowledgment of debt, accepted in 
the market as a medium of exchange, and that its value 
depends solely on the value of the credit on which it is based. 

An indispensable requisite of money is therefore the sub- 
stantial security on which it is based, the wealth which is the 
foundation of the credit which money represents. A further 
requisite is that the amount of the credit, the value of the 
money, be definitely stated in terms of the adopted standard 
commodity and that the stated amount of that commodity 
shall be obtainable for it, directly or indirectly; in other 

383 



384 CONCLUSIONS [286. 287 

words, that it shall be redeemable at its stated value. Still 
another requisite is that there shall be a communal agreement, 
expressed or implied, to accept the tokens of the credit, the 
acknowledgments of debt, as money (85). 

286. The Security of Money, — Just as the value of a 
credit is derived from the debtor's wealth that is subject to 
seizure and sale for the debt, so is the value of money derived 
from the wealth that is pledged to secure its redemption. This 
wealth is the real substance of the money. The token is 
merely the evidence that its bearer is part owner — or rather 
lessor of this wealth to the extent of the face value of the token. 

In the case of currency issued by the government and based 
on its ' ' credit, ' ' the community is the debtor, and the payment 
of the debt created by the issue of the currency is assured by 
the government's taxing power, the property of the tax payers 
becoming the substance of this money. 

In the case of bank currency the desirability of a double 
security — the issuers' and the agents' pledges (102) — has 
already been adverted to; and, in addition, mutual insurance 
of the currency among the agents of issue is necessary where 
the security is not absolutely free of risk. 

In the case of gold coin and gold certificates, the security 
consists of gold, and since this security is itself also the 
commodity of redemption, a further security is not necessary 
(94). 

But the case is different if the security consists of wealth 
which cannot be used directly for redemption. Such wealth 
is subject to price fluctuation, and possible loss from this 
cause must be completely guarded against by ample margin 
and insurance (289). 

287. The Issuer's Pledge. — Since currency is needed for 
no other purpose than that of exchanging goods and services, 
the objects of exchange, the goods themselves (87), would 
seem the most natural security for the currency. Imagine a 
hatter needing shoes, a shoemaker desiring to buy a lot of 
groceries, and a grocer wanting a hat. These wants could be 
supplied by exchanges, if a medium of exchange were issued, 



288J CURRENCY REFORM 385 

let us say, to the hatter on the security of his stock of goods 
(301). He could then use this money to buy shoes. With the 
same money the seller of the shoes would be enabled to buy 
groceries, and then, with the same money, the grocer could buy 
a hat. After the money is returned to the hatter and the cir- 
cuit of exchanges is completed, the money would have served 
its purpose as currency and might be retired. 

This illustration shows the function of money and the 
propriety and feasibility of employing business assets, like 
merchandise, as issuer's security. As a matter of fact, the 
transaction is typical of modern deposit banking in which, as 
we have seen (105), the real issuer of the medium of exchange 
is the borrower who obtains bank credit upon furnishing 
security to the bank in the form of pledges of business assets 
(104). 

288. The Agent's Pledge. — "When currency is emitted by 
the government through the agency of a bank, the latter, as 
intermediary agent (105), becomes custodian of the issuers' 
pledges, namely, the promissory notes or other evidences of 
indebtedness furnished by the real issuers. But since the 
people look to the government for the guarantee of the cur- 
rency notes, the government naturally requires some adequate 
pledge on the part of the banks, and this pledge, in whatever 
form it may be given, constitutes the agents' pledge of the 
currency (102), 

While business credits may properly be accepted by banks 
as security, they are not well adapted to be so accepted by the 
government. The uncertainty of business credits makes it 
necessary to subject them to repeated scrutiny, and while local 
banks can easily keep in touch with the business standing of 
their customers, it would be impracticable to burden the 
government with this duty. Even securities like stocks and 
bonds of various enterprises are too unstable to be accepted 
and looked after by a central authority. 

At first glance the securities now received for the issue of 

national bank notes, namely, federal bonds, would seem to be 

ideal for this purpose. But apart from the inadequacy of the 

volume of these bonds, and even if state and municipal bonds 

25 



386 CONCLUSIONS [289 

were to be accepted in addition, there is a fundamental 
objection that will be discussed later (333, 341). 

There can, however, be no such objection to the acceptance 
of real estate security. Liens on real property not exceeding, 
say, one-half of the assessed value ^^'^ would furnish a sound 
foundation for currency, as there would be ample margin in 
the value of the property (302). Such security would require 
at most an annual revision (303). 

Proposals to use land as security for credit currency have 
been opposed by pointing to the historic failures of Law's 
"Louisiana Bubble" and of the assignats and mandats of the 
French Revolution. But the real trouble in those instances was 
the fact that the notes were not redeemable in a specified quan- 
tity of a specified standard commodity. An assignat note for 100 
livres had back of it ostensibly the security of real estate, but 
as the security was not specified either in amount or location, 
it was practically no security at all. The denomination was 
in terms of "livres" which, at the time, were silver coins 
weighing about one-fifth of an ounce, but as such real livres 
could not be had for the notes from the issuer, their value was 
only that of an indefinite piece of land, nowhere definitely 
located, which, of course, was nothing. 

If a debt secured by land or real estate is redeemable at its 
face value in the commodity adopted as the value denominator 
or its market equivalent, it cannot possibly share the fate of 
the assignats. This is proven by the general preference for 
mortgages over most other forms of security. 

The expectation that land values will ultimately vanish 
on the introduction of the single-tax reform might be advanced 
by some as a more formidable objection to the use of liens on 
land as a security for currency, but it will be shown later (329) 
that this objection also does not hold good. 

289. Insurance of Currency. — Despite all possible pre- 
caution, and even though the margin of security may be 
ample for all contingencies that may be foreseen, an ocea- 

^"^ One-half of the lowest assessed value of the estate during the 
last five or ten years would, perhaps, be safer as a limit, in order to 
avoid the risk arising from short-lived land booms. 



290] CURRENCY REFORM 387 

sional depreciation of some of the securities beyond the margin 
is still within the scope of possibility. In order to be prepared 
for such contingency, an additional measure of safety, in the 
form of insurance, is desirable (286). 

As regards the issuers ' pledges — the borrowers ' promissory 
notes — such insurance is in vogue in the present general bank- 
ing system. Though these pledges are not at all free from the 
danger of depreciation, the banks are practically assured 
against loss from this source through what is virtually an 
insurance premium (102). This premium is collected by the 
banks from all borrowers as that part of the interest or dis- 
count charged on loans which constitutes payment for in- 
surance. In this way the borrowers collectively make good 
the losses which the banks suffer through the occasional failure 
of some of their borrowers (251) , Of course, only that portion 
of interest which in the average covers the losses arising in 
the business of money lending constitutes the insurance item. 
As some loans are more risky than others, the banker adjusts 
the insurance charges accordingly, by varying either the rate 
of discount or interest, or by imposing other conditions (290). 

The security which is now required of the banks as agents 
in the issue of currency — and which we have called the 
*' agents' pledge" — ^being bonds of the United States, is prac- 
tically free from any risk of depreciation, and therefore re- 
quires no insurance. When, however, securities are accepted 
by the government which are even remotely subject to de- 
preciation beyond the margin, it becomes necessary to adopt 
some system of insurance to cover any possible losses from this 
source. 

290. Insurance of Bank Credit. — To make currency abso- 
lutely safe is undeniably of paramount importance. For this 
reason ample safeguards are now adopted to assure the re- 
deemability of every national bank note. No one would for a 
moment question the propriety of the government insisting 
on all reasonable measures requisite for this purpose. 

Since bank credit transferable by check constitutes the 
largest item in the aggregate of our means of exchange, the 
very same reasons which exist for effectively assuring the 



388 CONCLUSIONS [290 

credit represented by national bank currency also apply to 
tlie assurance of bank credit subject to check (304a). The 
bank's depositors — the holders of bank credit — are in a meas- 
ure insured against loss from the partial or total failure of 
some of the real issuers of the bank credit, the borrowers from 
the bank, as above explained. But this insurance is incom- 
plete, as it does not secure the depositors against a partial 
or total failure of the bank itself. There are many reasons 
why the system of insurance, mutual as regards the depositors 
of each individual bank, should be amplified through a mutual 
insurance system embracing all the banks of a country, or at 
least of a district. Nevertheless, such insurance has not even 
been seriously considered until within recent years, and owing 
to the fear that this measure would foster reckless banking, 
but few attempts to put it into practice have thus far been 
made (3046). 

The opposition to this proposition is neither reasonable nor 
wise, since all concerned would be benefited, the banks as well 
as the depositors. When fire insurance was first preached, 
similar antagonism was encountered on the ground that it 
would encourage arson, and although it is much easier to con- 
ceal arson than bank fraud, the expediency of fire insurance 
is now generally recognized. The danger of a run on a bank, 
often caused by some unfounded rumor, would be completely 
removed by insurance. Numerous hoards of money, now hid- 
den away, would be brought to the banks. It is not unlikely 
that in this way the cash reserves would be increased ten 
per cent, or more, resulting in a proportionate extension of 
banking facilities. These obvious advantages would more than 
counterbalance such losses as might be entailed upon careful 
and conservative bankers through the assumption of unwar- 
ranted risks by those less conscientious. It is only a question 
of formulating and enacting an effective system of bank ex- 
amination and of imposing such obligations on the stock- 
holders, and particularly the directors, of a defaulting bank 
that only in rare and exceptional cases a contribution from 
other banks would be required. Through such a system the 
danger of improper baxiking and consequent losses would be 



itei] CURRENCY REFORM 389 

so far eliminated that every objection to a system of insuring 
bank deposits would be removed. As it is, each bank now 
protects itself against loss from defaulting borrowers by charg- 
ing all borrowers with the insurance item of interest, and 
there is certainly no adequate reason why depositors of banks 
should not be similarly protected against loss from the failure 
of a bank by a system of insurance among the banks themselves 
(220, 289, 304c). 

291. The Natural Limit of the Volume of Currency. — 
The question regarding the amount of currency that should 
be issued may here be briefly touched upon. There is no 
reason for restrictions apart from those which are necessary 
to insure the redeemability of all notes in the standard com- 
modity (302), So long as proper security is furnished and 
deposited with the government — the only agency to whom the 
people can confidently look for the requisite guarantee of the 
validity of the currency notes — the issue of notes may be 
safely extended, since the value of such notes cannot vary 
from the gold in which they are redeemable. Abundance of 
such currency cannot have any but a beneficial effect upon 
commerce and industry. 

Nor is there any real danger involved in an issue of more 
money than is actually required for the processes of pro- 
duction and exchange. No one possessing monetizable credit 
will have it monetized merely for the sake of doing so, and 
whenever there is a real need for more money, every obstacle 
to its issue is a restraint upon commerce. Every such restraint 
diminishes the amount of work that can be done and abridges 
the right of men to work (261). In the absence of undue 
restrictions the volume of money would simply adapt itself to 
the demand, the natural limit of which is reached when there 
is no advantage to be gained by any possessor of credit in 
having it monetized. And should it happen that the currency 
increases to an amount more than enough to satisfy this de- 
mand, the only result would be that each dollar would, in the 
average, be used less frequently. At present, there being not 
enough of the circulating medium, the rapidity of circulation 
is close to the maximum (120, 121), and yet the monetary flow 



390 CONCLUSIONS [292 

cannot keep pace with the industrial flow (270). Under 
present conditions commercial debts are always, even in the 
"prosperous" period of the cycle of business activity, much 
greater than need be, and they call for an excessive extension 
of business credits and a prolonged postponement of pay- 
ments as the cycle approaches the critical period. A super- 
abundance of properly secured currency, even if more than 
sufficient to meet all the requirements of the industrial flow, 
far from causing a depreciation of money, would simply 
result in relieving the unhealthy business conditions which 
now prevail. 

292. Currency Redemption. — As we have mentioned re- 
peatedly, credit currency, in order to circulate at par with 
gold, must be either redeemable in gold, or accepted by its 
issuer in payment at par with gold. 

Although under the present banking laws of the United 
States national banks may refuse to redeem their notes in 
gold and proffer legal-tender notes instead (295a), redemp- 
tion in gold can be effected, at least in an indirect manner, 
inasmuch as legal-tender notes are redeemed by the govern- 
ment in gold on demand. In a similar roundabout way bank 
checks are also redeemable in gold, apart from the fact that 
banks generally pay checks in gold when requested. 

If our present patchwork currency is to be replaced by a 
single, uniform issue (295&), that currency must be directly 
redeemable. To this end a certain amount of gold would be 
required as reserve. This condition would seem to impose an 
effective limitation on the volume of notes that can be issued, 
the extent of which must depend on the ratio which the gold 
reserve is to bear to the volume of the note issue. The next 
question, then, is, how far this ratio can be reduced with due 
regard to the requirement of redemption. 

Experience has shown that the demand for redemption 
varies between wide limits at different times, and unless pro- 
vision is made to meet the greatest demand that is likely to 
arise, redemption on demand will fail at times. Suppose it 
could be shown that the gold reserve may not be less than 



292] CURRENCY REFORM 391 

twenty per cent, of the total issue without jeopardizing the 
parity of currency, then the amount of currency cannot safely 
exceed five times the amount of gold held for its redemption. 

The difficulty thus presented may be stated as follows. A 
large proportion of reserve is necessary if currency is to be 
redeemable in gold on demand under all practical conditions. 
In fact, unless the gold held for redemption fully equals the 
issue, as is the ease with gold certificates, redemption on de- 
mand is subject to the proviso that notes will not he presented 
for redemption faster than the stock of gold can he replenished 
hefore it is exhausted. On the other hand, an expansion of 
the issue is possible only hy reducing the ratio of gold reserve. 
What ratio, then, can be safely adopted? The same problem 
exists with regard to bank credit subject to check. All bank 
depositors have the right to withdraw their deposits in cash, 
but it is well understood that banks never have on hand as 
much cash as their liabilities to depositors aggregate. 

The present system is really a compromise between the two 
extremes. A reserve fund amounting to from 15 to 25 per 
cent, of the deposit liabilities has come to be considered suffi- 
cient under ordinary conditions to enable the banks to meet 
all current demands for cash (104), and national banks are 
therefore required by law to maintain reserves of that amount. 
This proportion of cash reserve is however reduced to' less 
than one-eighth through the operation of the banking laws 
which permit deposits in certain specified banks to be counted 
as part of the reserve by the banks making the deposits, a 
condition which, however, is not permitted to those specified 
banks. 

And yet, with all these provisions, there are times when 
banks, throughout the country, are unable to meet the demands 
of their depositors for cash. The existing compromise is mani- 
festly inadequate to prevent financial crises. To compel banks 
to have a larger amount of cash to meet the demand of de- 
positors, it has been proposed that they should be required to 
hold a large percentage of their liabilities in the form of gold 
coin or bullion. But this would infallibly bring about a con- 
traction, not only of the currency, but also of bank credit, to 



392 CONCLUSIONS [293 

the great detriment of industrial welfare. If it were possible 
to reduce the present demand for gold, the proportion of that 
metal held in reserve might be reduced materially, and to find 
whether this is possible, the nature of the present demand for 
gold requires to be analyzed. 

293. The Demand for Gold. — ^Modern processes of mining 
gold have made it possible to obtain the metal on a commercial 
scale from more extensive deposits than ever before, and the 
output has attained unprecedented proportions. Of this con- 
tinuous supply a portion is used in the arts, another portion 
is hoarded, still another portion is put into circulation as coin, 
and the remainder goes to swell the tons upon tons already 
lying idle in treasuries and bank vaults, where the gold is used 
as reserve for credit currency and bank credit. The bulk of 
the metal is thus dug out of mines, only to be buried in costly 
fire and burglar proof vaults. 

The demand for gold in the arts and industries is engen- 
dered by the faculty of the metal directly or indirectly to 
satisfy desires, just as the demand for any other commodity is 
induced by its usefulness to man. Although that usefulness 
alone can explain the desire for, and hence the value of gold, 
only a part of the output is absorbed in the industrial channels. 
The remainder is applied for monetary purposes, for which 
the metal gold is adapted not so much on account of its specific 
properties, as principally because of its generally accepted 
value. 

The use of gold, or, for that matter, of silver, as currency 
is to be traced to the widely accepted but erroneous idea that 
standard coin alone is real, or, as it is frequently termed, 
''basic" money, and that all other devices for mediating 
exchanges are only "money substitutes" (88). 

The use of gold as reserve in banks has grown up with the 
modern system of banking. As has already been sho^vn in an 
earlier chapter (103), the original gold and silver notes were 
storage receipts, the amount of metal in store having been 
equal to the sum of the outstanding notes. Subsequently the 
amount of the outstanding notes was gradually increased, the 
added notes having been secured by pledges of other wealth. 



293] CURRENCY REFORM 393 

But in order to be prepared at any time to give ' ' real money ' ' 
for any of the outstanding ** money substitutes" that might be 
presented for exchange, that is, for ' ' redemption, ' ' the issuers 
of the notes found it necessary to retain on hand an amount 
of the metal equal to about one-quarter of the outstanding 
notes. This experience has prompted the present laws which 
require banks to maintain a reserve amounting to a certain 
fractional part of the deposits, with this difference, that other 
forms of currency, and even their own deposits in certain 
other banks, may be counted as reserve in addition to gold. 

Owing to these regulations the total lending capacity of all 
banks of the country — in other words, the possible volume of 
bank credit subject to check — is about eight times the actual 
amount of gold and lawful money held in reserve by all these 
banks (104). It follows, then, J;hat for each dollar of gold 
bullion or lawful money added to the sum total of bank reserves 
the lending capacity of all the banks of the country is increased 
not only by that one dollar, but by about seven dollars more. 

Of the stock of money available for bank reserve under 
present laws, standard coin is the only form which is not 
limited by law, and the supply of gold is therefore the only 
source available for a general increase of banking reserves. 
Every dollar's worth, that is to say, every 23.22 grains of 
pure gold, added to bank reserves, permits the lending out 
of about eight dollars at interest. It is not surprising, then, 
that banks are so eager to accumulate gold, and that their 
rivalry for its possession reaches a world-wide scope. As a 
result of this competition vast amounts of gold are shipped 
from time to time one way or another between the financial 
centres of the world. 

It is often said that these shipments are made to settle the 
balances of international commerce; but while this may be 
true in some cases, it is certainly not in all. The shipment of 
some eighty million dollars' worth of gold from London to 
New York in the fall of 1907 was described in the daily press 
at the time as a master stroke of finance to break the force of 
the panic of that year. But what office did this gold perform ? 
There was no abnormal demand for industrial purposes, nor 



394 CONCLUSIONS [294 

was there any excessive call for redeeming legal-tender notes, 
nor was this gold needed for currency, for practically none of 
it found its way into circulation. It remained in the vaults 
of banks and of the New York sub-treasury. The only use 
to which this gold was put was to amplify the reserves of 
banks which had fallen off because less cash was being returned 
to the banks than was checked out. It served the purpose of 
maintaining legal bank reserves — nothing else. 

The question naturally arises : Why were not other forms 
of security applied for this purpose ? Surely there was ample 
wealth at the command of the bankers to supply the needed 
security. The fact is, the law required that bank reserves 
shall consist of lawful money, and since, for some reason, 
lawful money was not being returned to the banks as fast as 
it was being drawn out, the banks were obliged to replenish 
the depleted reserves in the only way left open to them by our 
laws, namely, by importing gold. 

As far as the economic requirements of the case are con- 
cerned, any adequate security would have served the same 
purpose as the gold itself. But existing law made a dis- 
tinction, and the law had to be complied with. What, it may 
be asked, is the intent of such law ? 

According to many prominent writers on the subject, 
standard coin alone is **real" or ''basic" money, on which all 
"money substitutes" must be founded; hence it is held that 
every system of currency must be supported by an ample 
quantity of basic money to guard it against collapse. The 
prevalence of this belief accounts for the extensive use of gold 
for currency, and particularly for the laws which restrict bank 
reserves to "lawful" money, while at the same time preclud- 
ing the increase of "lawful" money beyond such additions as 
may be afforded through the mining of gold. Thus we ob- 
serve two causes of demand for gold as money, in that it is 
used as currency in the form of coin, and as bank reserve in 
the form of bullion or of coin. 

294. Can the Monetary Demand for Gold be Reduced? — 
When we consider that gold, when put in the form of coin, or 
held in place of coin in the form of buUion as bank reserve, 



294] CURRENCY REFORM SD5 

is put out of use entirely, except as a form of collateral security, 
the question forcibly obtrudes itself whether there is not 
some way of organizing a money system with gold as a standard 
of value, but without having to use the gold itself as a collateral 
security. 

As regards the use of gold for currency, we have before us 
the fact that almost all over the United States and Canada, 
and to a large extent in Europe generally, it is already prac- 
tically displaced by credit currency of one form or another. 
Yet, notwithstanding this substitution, gold has remained the 
standard of value. There is no reason why this process should 
not be carried to its logical conclusion. 

Inasmuch as credit currency fulfils all the requirements of 
a medium of exchange, there is really no need for coining the 
metal gold. The work of the mint might therefore be confined 
to preparing bars of refined gold to be used instead of coin 
for redeeming credit currency (302). Gold would then cease 
to be used as a money substance, but would remain the re- 
demption substance. With gold currency completely replaced 
by credit currency, the quantity of the metal available for 
purposes of redemption would be correspondingly increased. 

This would really amount to a demonetization of gold with- 
out, however, abandoning gold as our measure of value. The 
unit of value, the doUar, would still be 23.22 grains of pure 
gold, currency being redeemable in gold metal at that rate. 
But the call for redemption, the demand for gold in exchange 
for currency, would be reduced to the demand for industrial 
purposes, for the metal tendered in redemption would be 
merchandise and not money. Gold would thus be in the same 
category with all other forms of merchandise, its holder having 
to find a purchaser for it if he wants money in its place. 

As regards the use of gold for bank reserves, it has been 
noted that in this capacity the metal serves two purposes which 
must be considered separately. In one capacity it is part of 
the security for the bank notes and bank credit in circulation. 
When so employed, not all of it is held by the banks, but a 
large portion is stored in the vaults of the United States 
treasury and sub-treasuries and is represented in the banks in 



^96 CONCLUSION^ [295 

the form of gold certificates and gold deposit receipts. In 
the other capacity it serves as a store from which redemption 
of the outstanding notes of the banks is effected. 

Viewing the gold held in reserve in its capacity as security, 
it is plainly to be seen that it can be replaced by pledges of 
other forms of wealth (69). Gold has no inherent advantage 
in this capacity over other forms of wealth, when the latter is 
pledged in quantity ample for the purpose. So far as con- 
cerns the making of the circulating medium secure, there is 
absolutely no need of a definite store of the metal gold, and 
therefore no need for legislative provision to that end. 

But in its second capacity, namely, in that of serving as a 
medium of redemption, it cannot, so long as gold is the value 
denominator, be replaced by any other form of wealth, how- 
ever amply pledged, nor by currency notes of any kind. The 
necessity of providing for redemption requires absolutely that 
gold be held in reserve. The only question in this regard is 
the quantity required for this purpose. 

295. Centralized Redemption. — National banks, when 
called upon to redeem any of their notes, may do so with legal- 
tender notes instead of gold (292a). If they do supply gold, 
it is accommodation, not obligation. This exchange of legal- 
tender notes for bank notes cannot really be considered an 
act of redemption, for it is merely an exchange of one credit 
instrument for another of essentially equal import. The main 
distinction between legal-tender notes and bank notes is that 
which is arbitrarily made by legislation. From an economic 
standpoint both are virtually identical. If there is a differ- 
ence, it is rather in favor of the national bank notes, these 
being secured by the assets of the issuing banks as weU as by 
national credit. The law that makes it appear that this ex- 
change of one credit instrument for another is an act of re- 
demption really provides that the process of redeeming shall 
be an indirect one, involving a double operation, namely first, 
the exchange of national bank notes for legal-tender notes, 
and then the exchange of the latter for gold. 

In a project of currency, such as it is our purpose to 
present, there is of course no room for the multifarious forms 



295] CURRENCY REFORM 397 

of our present complicated system. The elimination of stand- 
ard coin, as above suggested, would go far toward effecting a 
much desired simplification. Besides subsidiary coin nothing 
more would be needed than one single kind of bank notes of 
various denominations, issued on the general principle of those 
of the national banks (2926), admitting as security for the 
notes not only obligations of the government, but also other 
obligations of unquestionable value; the notes to be redeem- 
able in gold, and to be issued in quantity limited only by 
demand conditioned on compliance with the indispensable 
requirements of security and redemption. 

With notes issued on such a plan, their redemption would 
serve no real purpose except when the gold is needed as 
merchandise, either in the industries or for adjusting inter- 
national balances. This would be especially the case if the 
gold given in redemption of the notes were furnished, as here 
proposed, in the form of bullion. Only those holders of notes 
requiring gold as such would have occasion to present notes 
for redemption, hence to obligate banks to give gold for their 
notes on demand, would really be to compel them to become 
gold merchants to that extent. Such a requirement would 
place the banks at a marked disadvantage as compared with 
other merchants, for if a dealer's stock of goods runs short, 
so that he cannot serve his customers at a moment's notice, 
his standing as a merchant does not thereby suffer, while if a 
bank were under legal obligation to supply a customer with 
gold on demand, its failure to do so would under the law con- 
stitute an act of bankruptcy. 

This danger is obviated in the present national banking 
system by the expedient of relegating to the national treasury 
the duty of gold redemption, which is accomplished in the 
way above described. The individual banks are thereby freed 
from the obligation of maintaining a gold reserve to meet the 
local demands. But this system of centralized redemption puts 
upon the federal government the onerous duty of maintain- 
ing the gold reserve. In the case of the issue of a uniform 
currency through national banks, the system of having the 
governnient redeem the notes may be continued, but the duty 



398 CONCLUSIONS [296 

of keeping the central gold reserve unimpaired should then 
logically be imposed on the banks, and this could be done 
through a system of assessments as occasion requires. 

Under this system the holders of notes would have the right 
to demand gold in exchange for the notes only from the gov- 
ernment, just as is the case under the present system ; but the 
redemption fund would be kept up by the banks, which is not 
the case at present. However, while the banks would not be 
under the additional obligation to furnish gold for notes over 
the counter, any more than they are under the existing system, 
there would be nothing to prevent them from accommodating 
their customers, as they do now, when they can conveniently 
do so. 

296. Deferred Redemption. — If the greatest possible 
freedom of expansion and consequent accommodation of the 
medium of exchange to the requirements of commerce is to 
be attained, we must find how small a proportion of gold metal 
would suffice as a redemption fund for an issue of currency 
notes redeemable in gold. Whatever system of note issue and 
redemption may be adopted in which the issue is greater in 
amount than the gold held for its redemption, there always 
remains the possibility that at some time the demand for 
redemption may exceed the reserve held for that purpose. A 
system of centralized redemption would doubtless have the 
effect of reducing this danger, but could not wholly remove it. 

Experience has proved that at critical junctures of busi- 
ness disturbance banks are unable to meet their obligations to 
pay cash to their depositors on demand. As is well known, 
the drain upon banks during a crisis is so persistent that even 
some of the most thoroughly solvent institutions cannot keep 
up their reserves. Ordinarily this condition would mean 
bankruptcy, but at such periods banking laws are in a measure 
held in abeyance, if only for the reason that their enforcement 
would but intensify the prevailing distress. 

This at once suggests a simple arrangement by which a 
small gold reserve would amply suffice. We need only enact 
into law in regard to gold redemption that which has hereto- 
fore been permitted in contraventiojj of the law in regard to 



2961 CURRENCY REFORM 399 

cash obligations of banks. In other words, disaster due to a 
possible exhaustion of the gold reserve can be met by a legal- 
ized postponement of actual gold redemption, that is to say, 
by allowing redemption to be deferred for a limited period 
when, and only when, occasion absolutely requires (303a). 
The time limit would have to be determined by the exigencies 
of the occasion and with regard to the methods adopted for 
replenishing the redemption store of gold. 

This proposition should not be misunderstood. It does not 
include giving a bank the right to defer the cashing of cheeks 
of its depositors. On the contrary, the object is to facilitate 
the issue of currency so that the supply of cash will always 
be sufficient. It is only to the redemption of the currency in 
gold that the proposed delay would apply. 

Under this system the notes would ordinarily be redeem- 
able in gold on demand, but in case of emergency that re- 
demption would be subject to a postponement for a time suffi- 
cient to replenish the redemption fund. This would be but a 
limited period under any possible circumstances. 

It is of course clear enough that this is directly opposed to 
the frequently propounded doctrine that no monetary system 
on a gold basis can be safe and sound, unless the currency is 
redeemable in gold on demand. Let us more closely examine 
whether this condition is really indispensable. 

Apart from the use of gold for currency and bank reserves, 
its use in the industries is the only reason for its demand. In 
the field of industry gold is merchandise, just as pig iron is to 
the founder, and wool or yarn is to the cloth manufacturer. 
When these business men find their respective sources of 
supply in the market temporarily exhausted, in other words, 
when the goods they need are not to be found in stock, they 
must needs await their turn to be supplied. A similar short- 
age of gold for redeeming notes would simply mean that the 
stock of gold on hand has run short and needs replenishing. 

The holder of money has been described by John Stuart 
Mill as one possessing **a right to a certain value of the 
produce of the country, to be selected at pleasure. ' ' But this 
statement of the right is too broad. The holder of money 



400 CONCLUSIONS [296 

cannot command with it any produce of the country, unless 
the same is being offered in the market, even though such 
produce may exist in abundance. Mill's statement should 
therefore be amended to read: "a right to a certain value of 
such produce of the country as is offered in the market." 
Accordingly, a holder of currency, having a right to gold in 
exchange for it, should have this right subject to the supply 
of gold in the market, and if the market supply of gold falls 
short of the demand in the same market, a delay of the supply 
would be a natural consequence, just as would be the case if 
the supply of any other product were momentarily insufficient. 
What reason have we for requiring a supply of gold to be 
kept in store to meet on the instant every possible demand for 
it? No one would expect this with regard to any other mer- 
chandise. The adoption of the gold standard does not and 
cannot involve the obligation of maintaining an inexhaustible 
supply of gold for purposes of redemption, if for no other 
reason than that such a supply is physically impossible. As a 
matter of fact, repeated experiences have demonstrated con- 
clusively that an immediate redemption in gold is not neces- 
sary to keep notes at par. Among these experiences may be 
cited several noted instances. 

After the Bank of England, in February of 1797, was 
granted the right to temporarily suspend specie payment, its 
notes continued to circulate at par. Depreciation ensued only 
at a later period, when it became apparent that resumption of 
specie payment might be delayed indefinitely. 

From the time, in 1875, when the Congress of the United 
States provided for the resumption of specie payment, the 
value of the then depreciated greenbacks steadily rose and 
attained parity with gold some time Jyefore the first of Januarj% 
1879, the date set for resumption. Moreover, the depreciation 
of the notes during the period preceding the date of resumption 
was much less than the then current rate of discount on first 
class obligations payable on that date. 

As already noted, the so-called "redemption" of bank 
notes in legal-tender notes cannot be considered as actual re- 
demption. Under our present laws bank notes are not really 



296] CURRENCY REFORM 401 

redeemable in gold on demand, yet they are accepted in the 
commercial world without hesitation at par with gold. 

Furthermore, legal-tender notes are legally redeemable 
only at the treasury and sub-treasuries of the United States. 
Such notes, when circulating at a distance from the nearest 
point of redemption, are by no means immediately convertible 
into gold, yet they have remained at par with gold since the 
time when specie payment was resumed in 1879. 

During the period before subsidiary coin was made re- 
deemable in standard coin, and while it was accepted by the 
government at par only when tendered in limited quantity, it 
yet freely circulated at par with standard coin. 

During monetary panics like those of 1893 and 1907 it was 
the scarcity of currency as a medium of exchange, and not 
the scarcity of gold as a medium of redemption which char- 
acterized the situation. Nobody objected to any of the cur- 
rency, whether legal-tender notes, bank notes, silver dollars or 
silver certificates. Because of the lack of currency, clearing 
house certificates had to be issued and were freely accepted as 
means of payment. The question was not one of a demand 
for gold, but of a demand for currency. The fact that in 1907 
many millions of dollars' worth of gold was imported only 
proved the great demand for a medium of exchange, for there 
was no unusual demand for a medium of redemption. The 
supply of available money for bank reserve was cut off by the 
general resort to hoarding, and no other source of supply was 
open under the existing laws except the gold market abroad. 
If legal currency could have been issued freely on security 
of actual wealth other than gold, there would have been no 
lack of currency, and consequently no panic; and the im- 
portation of gold would not have been necessary. 

All these instances clearly prove that the immediate con- 
vertibility of currency into gold is not necessary to keep it at 
par with gold. An assured certainty of redemption within 
a limited space of time has proved to be amply sufficient (315) . 

As already stated, this discussion has bearing only on the 
redemption of currency in gold, but not on the cashing of 
valid checks. Were such a measure as that here proposed 
26 



402 CONCLUSIONS [297 

once adopted, any bank could obtain currency on terms which 
would leave it no valid excuse for failure to provide all the 
cash that may be legitimately demanded. The suggested post- 
ponement has reference only to the furnishing of gold metal 
in exchange for currency, and while such a postponement 
might affect the activity of workers in gold, just as a partial 
failure of the cotton crop interferes with the cotton industry, 
the business activity of the whole community could not pos- 
sibly suffer, as it suffers now in consequence of money panics. 

If our currency system were reformed on these lines, the 
question of the ratio of the gold reserve would offer no diffi- 
culty. Since banks would not need to keep gold as cash reserve, 
the demand for this metal would be so greatly reduced that a 
temporary exhaustion of the central gold reserve would be but 
remotely possible (320), even were the legal rate of gold 
reserve reduced to but a small fraction of the present require- 
ment, especially as the only natural demand, that of the gold 
industry, would be far more than covered by the current out- 
put of gold from the mines. It is quite possible that a gold 
reserve of only one per cent, of the amount of currency issued 
would ultimately be found to cover fuUy every demand made 
on the redemption fund without undue strain on the system 
of its replenishment (303&). 

297. Procuring Gold for Redemption. — As already stated, 
the gold needed for redemption is to be furnished by the 
banks through whose agency the notes are issued. Whenever 
the gold in the redemption fund falls below the amount cor- 
responding to the legal rate of gold reserve, the deficit would 
have to be covered by the banks of issue, each to supply the 
share assessed against it and to receive in exchange for this 
gold an equivalent of notes from the redemption fund. The 
notification to furnish gold would be sent to the banks at 
stated periods, let us say, monthly. The rate of assessment 
would accordingly be computed at the close of each month, 
and the banks be required to supply their respective amounts 
of gold within the succeeding month. Under this rule the 
amount of gold in the redemption fund would never be much 
less than the amount prescribed for it, unless, indeed, the 



297] CURRENCY REFORM 403 

demand during the current month happens to be extra- 
ordinarily large. 

Should this reserve become exhausted, then those who 
would next apply to have notes redeemed, that is to say, 
those who would want to buy gold from the reserve fund, 
would simply have to await their turn (320). Some assur- 
ance of the good faith of those applying would of course be 
necessary to preclude an abuse of the system by speculators. 
If at the end of any month there were still a deficiency, the 
rate of gold assessment against the banks for the following 
month would have to be computed to meet the deficit and 
also to restore the normal ratio. 

A frequent recurrence of such deficits would show that the 
adopted ratio of reserve is too low, and its increase would 
accordingly be indicated. On the other hand, were the monthly 
demand for gold never to exceed a small fraction of this fund, 
a reduction of the ratio would be admissible. 

It is, of course, not impossible that the demand for gold 
may, under some abnormal condition, rise to a point where it 
would be impracticable for the banks to meet during the en- 
suing month the assessment called for by the proposed rule. 
In view of this contingency the law might be made to provide 
that, when the assessment for gold in any one month were to 
exceed, say, two per cent., the time allowed for the banks to 
turn in the gold shall be extended for a limited period (303) . 

There is no reason to fear that the possibility of a post- 
poned gold redemption would be a source of weakness. When 
considered in the light of existing conditions, all such appre- 
hension will be found groundless. Under the present system 
a simultaneous demand on all banks for cash amounting to 
only ten per cent, of their deposits would exhaust nearly every 
bank reserve and most likely precipitate a financial crisis, 
while under the system here outlined a similar demand for 
gold in exchange for currency notes, if distributed over a few 
months, would be met with hardly any effect on general busi- 
ness conditions. 



404 CONCLUSIONS [298 

298. The Communal Agreement. — However valid and 
sound may be the credit which a credit instrument represents, 
it is not currency, unless it is brought within the scope of that 
social compact through which it becomes accepted in the 
market (85). This is done by giving the credit instrument 
the legal form of currency notes. Beyond this, a well grounded 
public confidence in the soundness of the credit, coupled with 
assurance of redeemability, is all that is economically necessary 
to give the notes currency as money. This confidence is at 
present imparted through the governmental control of the issue 
and custody of the agents' security; and, indeed, the govern- 
ment is the only authority to which the people can look with 
entire confidence for the necessary assurance. 

From a strictly economic standpoint the monetization of 
valid credit is a very simple process. Ever since credit money 
has come into use, it has been unhesitatingly accepted as a 
medium of exchange, whenever its security was regarded as 
adequate, its redeemability unquestioned and its circulation 
legally permitted. As a matter of fact, governments have had 
little trouble in forcing even inadequately secured notes into 
use by declaring them legal tender, and such currency has 
continued to circulate for long periods of time, though usually 
in varying degrees of depreciation. These facts prove that 
there is no inherent difficulty in the way of converting valid 
credit into valid money. Such conversion, however, is now 
regulated by laws through which the issue of currency is 
restricted, although the restriction itself cannot be justified by 
sound economic considerations (238-239). 

There is a popular notion that the creation of money is 
possible only through some mysterious power possessed by 
government. According to this idea nothing can be money 
that is not legal tender. This opinion has no foundation in 
fact, for both bank notes and bank checks constantly perform 
the function of money. It is not the government's "fiat," but 
the certainty of redemption, that prompts the common con- 
sent to accept the notes in the market, and it is this accept- 
ability that gives the notes their money quality. An author- 
itative control of currency issues is indeed desirable for several 
reasons, but it is not indispensable. 



299. 300] CURRENCY REFORM 405 

But, however exercised, this control should not go beyond 
the enforcement of such regulations as are necessary to make 
certain of the security and to assure redemption. It should 
not go to the length of arbitrarily limiting or in any other way 
needlessly hampering the issue of currency. 

299. The Process of Issuing Currency. — The process of 
issuing bank currency really consists of three successive opera- 
tions. The government, having manufactured the notes which 
are to serve as money tokens, delivers them to the issuing bank 
in exchange for a security sufficient to guarantee the return 
of the notes or their equivalent to the government. The bank, 
in due course, delivers the currency notes to its customers in 
exchange for promissory notes or other security through which 
the return of the currency or its equivalent to the bank is 
assured. And, finally, the customers use the notes as a medium 
of exchange in purchasing things or services. Thereupon, and 
not until then, do the bank notes become current money. 

It will be remembered that credit is ownership of wealth 
in possession of the debtor (68), just as a debt is possession of 
wealth owned by the creditor. Considered in this light, the 
third transaction alone constitutes a lending of actual wealth, 
or the creation of a real credit relation. The first transaction, 
like the second, is merely an exchange of credit instruments. 
Both transactions are part of the process by which government 
exercises control over the issue of currency and is put in posi- 
tion to warrant the validity of the notes. The first transaction 
is related to the second as wholesaling is to retailing. Other- 
wise there is no essential difference between the two. The bank 
is debtor to the government in the same sense in which the 
borrower is debtor to the bank, 

300. Money Tokens. — A money token is simply an evi- 
dence of debt by the issuer, emitted in a form which is 
accepted in the market as money to the amount betokened. 
The material of which money tokens are made must not be 
mistaken for the substance of the money itself. That sub- 
stance consists of the wealth which is pledged as security for 
the issue, and this is true even of standard coin, in which the 
security is borne by the token itself. The paper, bronze, nickel 



406 CONCLUSIONS [301 

or silver of which money tokens other than standard coin are 
made have no influence on the value of the money as such. At 
the same time, due care must be bestowed on the preparation 
of the tokens, so that they may be properly adapted for their 
function as currency. The notes now in use fully meet this 
requirement. They are generally given such form as to be 
practically safe against falsification, and in their usual shape 
and size are sufficiently characteristic to be readily recognized 
as money. 

For various reasons it is desirable that the tokens be pre- 
pared by the government, or at least under its supervision and 
control, and that the government guarantee the value of the 
security (92). In this way the issue may be maintained in 
uniformity, and abuses in the issue most effectively guarded 
against. Moreover, there is naturally a preference for guar- 
antee by the community over that by any other authority. 

301. The Cost of Issuing Currency. — When the govern- 
ment undertakes the administration of the currency system, 
including the printing of the notes and their distribution to 
the agents of issue, the question arises whether the expense of 
this work should be borne by the state or be collected from the 
issuers through the agents of the issue. 

In the illustration of the hatter, the shoemaker and the 
grocer (287) we assumed that the hatter became the issuer of 
the notes through which the exchanges were mediated. Is it 
just to make him pay the cost of the issue? The three men 
of the illustration were equally benefited by this method of 
exchange, hence it does not seem right to expect any one of 
them to bear the total expense of the system. So likewise, in 
the real world, the benefit of the currency system is shared by 
the community in general. There is every reason why the 
cost of making and distributing the notes and of replacing the 
worn ones should be paid by the people as a whole, that is, out 
of the public treasury. It would be unjust to place upon a 
limited number — represented by the hatter of our illustration 
— the burden of this cost (310). For the same reason it is 
improper that banks of issue should be taxed to meet this 
expense. Nor would any other tax on the issue of notes be 



30ie] CURRENCY REFORM 407 

justifiable, just as neither of the three men of our illustration 
should be mulcted for doing that which benefits all alike (303) . 

302. Plan of Currency Reform. — The proposal presented 
in the following pages is worked out in detail merely to show 
that on the general principle already stated a practicable plan 
can be elaborated. It is quite possible that some experiences 
of the past and others of the future may point out various 
modifications as regards the details, and even different ways 
of reaching the same end. The purpose is to remove those 
restrictions on the utilization of credit as a medium of exchange 
which are not only needless, but positively harmful. 

A currency reform with this end in view may be effected 
without any disturbance -of business conditions and could be 
realized with but few changes in the details of the present 
national banking system. 

The principal change is one which is in line with the fre- 
quently proposed issue of ' ' asset currency, ' ' It consists essen- 
tially in broadening the range of securities acceptable from 
the agents of issue by the treasury as a basis for bank notes. 
But in view of the continuous scrutiny required and of other 
complications incident to the use of ordinary commercial paper 
as a security to be held by the government for the issue of 
currency, the proposition already indicated (288) would ap- 
pear to be decidedly preferable. 

In the plan here proposed the "assets" to be accepted as 
a basis for currency, besides national, state and municipal 
bonds, are to be real estate liens, of which there is undoubtedly 
an ample supply obtainable to cover every possible demand 
for currency. In this way it would not be necessary to have 
recourse to ephemeral business paper to supply that security 
for the issue which is placed in custody of the government. 

Notes so issued should be redeemable in gold from a re- 
demption fund in custody of the government. It may suffice 
to confine the offices of redemption to the treasury and the 
sub-treasuries of the United States, but if found expedient, 
additional branches could be opened, say, in the principal post 
offices. As under this system the coinage of gold could be dis- 



408 CONCLUSIONS [303 

continued, a demand for redemption would be honored only 
in amounts of, say, $100 and multiples, adapted to the sizes of 
the bars of bullion in which redemption would be effected 
(294), 

Since redemption could be demanded only from the gov- 
ernment, banks being relieved of the obligation to hand out the 
metal over their counters on demand, there would be no need for 
distinguishing the notes issued through one bank from those 
issued through another, hence all notes of equal denomination 
could be made alike in aU details. This would not only simplify 
the present cumbersome and costly method of issuing special 
notes to each bank, but would also facilitate the detection of 
counterfeits, if such came into circulation. The chief object 
of this reform being the removal of all unnecessary restrictions 
to the volume of currency (291), the production of notes 
should be continued, and the demand for notes supplied, so 
long as those conditions are complied with which would 
assure that every note issued is regularly redeemable in the 
value denominator. Since currency can be used only for 
mediating exchanges, every call for additional currency in- 
dicates that there is further need for means of exchange, and 
every refusal to issue currency in response to such call is a 
restraint of the right to make exchanges. 

These notes would readily take the place of all forms of 
currency now in use, with the exception of fractional currency 
which, in its present form, leaves practically nothing to be 
desired. 

The banks through which this currency is to be issued 
would use it as they now employ national bank notes. By 
the process of discounting promissory notes, business credits 
would, as now, be turned into bank credit and made available 
for mediating exchanges, through either currency or checks. 
Such amounts of notes as would not be put into actual circu- 
lation would constitute the reserve. 

303. Organization of Banks of Issue. — Whether we view 
a bank as an intermediary agent between the real issuer of 
currency and the government that controls the issue (102), 
or as the retail distributer of the money tokens furnished in 
gross quantity by the government, its function is that of con- 



3031 CURRENCY REFORM 409 

verting ordinary credit into money, or, as it may be termed, 
of monetizing or mobilizing credit. 

It follows that, in the last analysis, the raw material of 
banks of issue is not money, but credit, and for this reason 
the prerequisites for their establishment need be nothing 
more than valid credit. Upon handing the instruments of this 
credit to the government as security, the banks would obtain 
from the government other credit instruments, namely cur- 
rency notes, whereby that credit would be monetized. It is 
therefore quite feasible to organize banks on the basis of stock 
issued, not against cash, but against certain specified forms of 
credit, such as bonds of the federal, state and perhaps munici- 
pal governments, and recorded real estate liens (288), which, 
in turn, are to be accepted by the government as security for 
the currency issued to the banks. In this way the banks would 
obtain their working funds. 

Should any of the securities furnished by a bank as basis 
for currency depreciate below the legally prescribed limit of 
margin, the bank would be required to make good the shortage, 
either by furnishing more security, or by reducing its issue. 

Inasmuch as it is conceivable that notwithstanding all 
these precautions a bank may become insolvent to such a 
degree that it cannot redeem the full amount of the currency 
issued through its agency, the provision should be made that 
in such case a proportionate tax would be imposed on all other 
banks of issue to cover the deficiency. This should be the 
only tax imposed on the issue of currency, apart from the 
obligations of furnishing security and of providing and main- 
taining the redemption fund (301). 

The gold for this latter fund could be obtained by requir- 
ing every bank applying for currency to furnish not only the 
prescribed amount of securities, but also gold to the amount 
of such percentage of the currency issued as experience in- 
dicated as sufficient. To begin with, it might be advisable that 
a rate of ten or fifteen per cent, be adopted, this rate to be 
afterwards reduced to a point indicated by experience as 
being entirely safe. It is probable, as already noted (296&), 
that a rate as low as one per cent, may in the end be found to 
be fuUy adequate. 



410 CONCLUSIONS [sos 

When currency notes are presented for redemption, they 
would be turned into this fund in exchange for gold taken 
from it. While this fund would thus remain unimpaired, its 
metal portion would be reduced, and in order to restore normal 
conditions, monthly assessments would be made on all banks 
of issue for gold in exchange for the notes in that fund. The 
comptroller of the currency might be empowered to replenish 
the stock of gold by using currency from the redemption fund 
for the purchase of gold metal in the market at a price not 
more than the legal rate — 23.22 grains of pure gold per dollar 
— and thus avoid the necessity of calling on the banks for it. 
Since gold would no longer be coined, the possessors of the 
metal would find its sale to the treasury a means of converting 
it into money, just as the same result is now obtained by bring- 
ing the gold to be coined, the only difference being that the 
amount so converted would not depend on the supply of the 
metal, but on the demand for it by the redemption fund. 

Should at any time and for any reason the redemption 
fund become entirely depleted of gold, applicants for the 
metal would simply have to wait for the stock to be re- 
plenished (296a). As all applicants for gold in redemption 
of notes would get the metal in turn as fast as it came in 
from the sources provided, there could never be anything 
in the nature of an actual suspension of gold redemption. 
The delay would merely take the form of a time of grace. If 
such conditions were to prevail at the close of a month, the 
assessments on the banks of issue would naturally have to 
cover not only the amount awaiting redemption, but also an 
amount restoring the redemption fund to its normal status. 

In view of the possibility that the demand on the banks 
for gold in any one month may be more than the banks can 
supply within that period without excessive pressure on the 
market for that metal, provision should be made for shifting 
at least a part of the assessments on the succeeding month 
or months (297). 

If such a plan were universally adopted, there would be 
no demand for gold save for industrial purposes. That de- 
mand would readily be covered by the new gold coming into 
the market, and it would therefore be out of reasonable prob- 



804] CURRENCY REFORM 411 

ability that the call for gold upon the redemption fund would 
ever amount to much (320a). The likelihood is rather that 
gold would always be freely offered in the market, since the 
metal would no longer be admitted to coinage. 

But supposing the plan to be adopted only in one country, 
one of the effects would doubtless be a tendency to the ex- 
portation of gold and a possible demand for gold in re- 
demption of notes to the extent of exhausting the redemption 
fund of its metal reserve (320&). However, since a delay of 
gold redemption would be legally admissible, a temporary 
exhaustion of the gold of this fund could not of itself react 
upon the general status of the currency. To guard against 
merely speculative or wanton calls for gold in exchange for 
notes, it might be expedient to require with each call for re- 
demption a deposit of, say five or ten per cent, of the amount, 
this deposit to be forfeited if the demand is not made effective 
when the. supply is offered. 

The reasons above adduced for reducing the gold redemp- 
tion fund to a small percentage of the currency issue do not 
hold good as regards the reserve fund of banks. Experience 
has shown that banks should maintain a substantial reserve 
fund of actual currency, and there are good reasons why this 
fund should not be less than about 15 per cent, of the deposit 
liabilities. This is true even though we have repeatedly 
pointed out that the requirement of a large reserve fund is 
objectionable, in so far as the expansion of bank credit is 
thereby hampered, making it often impossible for banks, es- 
pecially when the cycle of business activity reaches the hoard- 
ing stage (273), to meet all demands of legitimate business for 
** money." But once the needless limitations on the issue of 
currency are removed, this objection falls away. 

304. Deposit Insurance. — The desirability of mutual in- 
surance of deposits has already been adverted to (290a). An 
insurance fund may be created by requiring all banks to make 
a deposit equal to, say, two per cent, of their capital and sur- 
plus, and to maintain that proportion as their capital and 
surplus is increased or decreased. 

Assuming that a bank becomes insolvent, the winding up 
of its affairs would require (1) that the payment of the checks 



412 CONCLUSIONS [304 

of depositors be continued to the extent of their balances, 
utilizing for this purpose the available assets of the bank and 
drawing on the insurance fund for such additional amount 
as may be needed; (2) that, also by drawing on the insurance 
fund as may be necessary, an amount of currency equal to 
the sum issued through the insolvent bank be paid to the 
government to be retired, and that the stock securities held 
by the government be thereupon turned over to the receiver 
of the bank; (3) that the other assets of the bank be realized 
upon as promptly as possible. From these collections the 
insurance fund is to be reimbursed as far as possible for the 
drafts made upon it. If these drafts cannot be repaid in full 
from the collections, the deficit is to be charged against the 
stockholders' securities which had been turned over to the 
receiver, and assessed on the stockholders pro rata. In the 
case that some of the stockholders fail to pay that assessment, 
the amount is to be obtained by selling their respective se- 
curities, the balance, if any, to be returned to them. But it 
may happen that the stockholders' securities are inadequate 
to cover the deficit due to the insurance fund, and in this case 
the remaining deficit is to be made up by assessment on all 
banks in proportion to the sum of their deposits and their 
currency issue (290c). 

The following additional rule should in justice to all con- 
cerned become a part of the plan whenever a system of deposit 
insurance is adopted. 

It is clear that the insurance fund cannot lose through 
the failure of a bank unless its assets fall short of its liabilities 
for currency issued and for deposits. The stock of a bank and 
its surplus, if there be any, is accordingly the margin of safety 
as regards a possible loss to the insurance fund (104). In 
fairness to all banks embraced in the insurance system, this 
margin of safety should not in any bank be less than a certain 
proportion of the total liabilities. It would be advisable to 
require each bank to deposit in the insurance fund an amount 
of stockholders' securities, over and above those deposited in 
the treasury for currency issued, of a given proportion, say 
one-fourth, of the deposit liabilities, to be utilized as receiver's 
assets if the respective bank fails. Each bank should accord- 



305] CURRENCY REFORM 413 

ingly be required to increase its capital stock whenever its 
deposit liabilities increase beyond the proportionate amount of 
the securities already furnished, and to deposit in the insurance 
fund the securities on which the new stock is issued. The 
stockholders being the first and principal losers in the event 
of a failure of the bank, this wiU go far towards putting a stop 
to imprudent and unsound banking. 

Bank failures of the past with attending losses to de- 
positors prove that the present means for the protection of 
bank credit are not as efficacious as they should be. It would 
therefore seem that the insurance fund would frequently be 
called into requisition. But it should be remembered that the 
conditions which are at the root of most bank failures — apart 
from those which arise through sheer mismanagement or crim- 
inality — would undergo a wholesome change by currency re- 
form on the line proposed. From the moment that the cause 
which entails an endless succession of business failures (255) 
is removed, the risk now inherent in the business of deposit 
banking would be so largely reduced that bank failures due 
to the failures of customers would become comparatively rare. 
The system of deposit insurance would therefore become little 
more than a formality. 

It has been only of late that mutual insurance of deposits 
has been put in practice (290&). This has been done in some 
western states of the Union under provisions of law making 
such insurance obligatory on state banks. But the enactments 
appear to have been formulated without proper precaution 
against loose practices, and the experiment has been disap- 
pointing. The system is nevertheless likely to be more gen- 
erally introduced after experience has indicated the remedies 
for such defects as have shown themselves. 

305. Missing or Lost Notes. — Currency notes, when in 
circulation, are liable to be lost or destroyed, and it may be 
desirable that an approximate accounting of these notes be 
effected. 

This could be done by periodically changing the design, 
or at least a serial letter or other mark, say every ten or twenty 
years, and as worn notes are returned and cancelled, keep 



414 CONCLUSIONS [306. 307 

account of their series. If after the lapse of such a period the 
notes of the preceding series have not all come back and been 
cancelled, it may be assumed that the notes remaining out 
have been lost. An amount of new notes equal to that of the 
supposedly lost notes could then be turned into the national 
treasury, and if subsequently any of the missing notes should 
be received for cancellation, they would be exchanged for 
other notes out of that treasury and thereupon cancelled. 

The rationale of this procedure wiU be readily understood. 
If notes are accidentally destroyed or lost, the amount in 
existence will of course be less than that issued. Since for 
every note issued there is a corresponding security on deposit 
with the government, there would be an excess of the debtors' 
over the creditors' account in the money system. In the way 
here suggested the discrepancy would be eliminated and the 
proper balance between securities covering the debts and the 
actual volume of currency, the credits, could be maintained 
close enough for all practical purposes. 

306. The Legal-tender Quality. — The question arises as 
to whether or not this proposed currency should be made 
legal tender. In the ordinary course of business such a 
provision would be superfluous, just as it is found unnecessary 
as regards bank checks and national bank notes. Like these, 
the currency here proposed would naturally circulate on its 
merits. The principal function of the banks being that of 
monetizing the credit of their customers, the means of that 
monetization, the currency notes, would naturally be legal 
tender as between them. No other form of currency outside 
of minor coin being in use, it would also, of course, be legal 
tender for all debts, public or private, expressed in terms of 
dollars. "While it would thus be really unnecessary, there 
would, on the other hand, be no objection to expressly declar- 
ing the notes to be legal tender (99). 

307. The Function of Banks of Issue. — The expediency 
of issuing the stock of banking institutions against securities 
and liens instead of money may appear questionable. Yet 
there is nothing improper or unreasonable in it. From a 
purely economic standpoint there is no difference of value be- 



808] CURRENCY REFORM 415 

tween fully assured credit and money. The difference is of 
a merely conventional nature, and being due exclusively to 
statutory enactment, it can be eliminated by statutory pro- 
vision. The subject resolves itself into a question of dealing 
with conventional prejudices, such as fell away when the 
public became educated to the use of bank notes and checks in 
lieu of specie. As a matter of fact, checks constitute a money 
system based on business credits and are, in a sense, a proto- 
type of the currency notes here proposed. There is absolutely 
no reason why this currency should be any less effective for 
the purpose of mediating exchanges than the national bank 
notes of the present banking system. 

As already stated, banks of issue perform the function of 
distributing the currency into its proper channels, or, looking 
at it in another way, of mediating the monetization of busi- 
ness credits. The examination and insurance of the securities 
representing these credits are the proper function of the local 
banks, which would monetize those credits as they do now, 
by discounting promissory notes and other credit instruments. 

Banking institutions would also continue to perform that 
function of modern banks which consists in effecting the 
clearance of business accounts by check. But since the dis- 
counts from loans would no longer suffice to cover the clerical 
expenses of this work, the banks would have to look for an 
income from those to whom they render this service. This in- 
come could be obtained by the banks charging a certain amount 
for each check made out by a depositor and passed back to 
him through the bank. Business men would then be paying 
directly for the labor involved in mediating their payments 
instead of indirectly, as under the present system. 

308. Summary. — The principal aim of the currency system 
here proposed is the removal of that impediment which now 
prevents the volume of currency from adapting itself to the 
effective demand for money. This means a complete reversal 
of the prevailing policy of finance which has grown up on 
the fallacious theory that the value of the "money unit" de- 
pends on the volume of money, and that therefore every in- 
crease of the volume is attended by a corresponding increase 



416 CONCLUSIONS 

of the price level, and vice versa. Imbued with this theory, 
John Stuart Mill (239) and others of that school came to 
believe that every permanent increase of currency results iq a 
loss to the holders of existing notes and a corresponding gain 
to the issuers of the new notes. This misconception still 
remains an obstacle to the institution of a rational reform of 
the currency. 

The present proposition is based on the self-evident fact 
that currency notes redeemable in gold have the same value 
as the gold in which they are redeemable. Being freed from 
arbitrary restrictions, the volume of currency would automat- 
ically adjust itself to the requirements of commerce, expand- 
ing and contracting where and when the demands of business 
dictate. Currency notes issued under the proposed rules 
would possess all the various requisites of a perfect medium 
of exchange. They would be fully secured and, being redeem- 
able in gold, would be on a par with gold. 

Notwithstanding the increased currency issue, there would 
be no danger of a shortage of gold for purposes of redemption. 
The demand for the metal would no longer include a demand 
for banking purposes and would subside to the level of its 
industrial requirements. The demand for its use as currency 
and bank reserve being practically done away with, the gold 
now locked up in treasuries for redemption purposes, and in 
bank vaults as reserve, would, at least in part, find its way 
into the market as metal, so that the supply of gold to meet 
all market demands for the metal would never fall short. It 
is only because consideration should always be given to every 
possible contingency, however remote, that some provision, 
as already suggested (296-297), should be made to meet a 
possible temporary exhaustion of the redemption fund, though 
such an exhaustion under the proposed system is almost in- 
conceivable. 

309. A Credit Clearance System. — Herbert Spencer has 
pointed out that legislation generally follows rather than leads 
in the march of progress. Legislators are presumed to repre- 
sent their electorate and therefore rarely feel justified in 



309] CURRENCY REFORM 417 

advocating a reform which has not the sanction of a prevailing 
public opinion. 

The volume theory of the value of money having long 
been preached by economists of standing and reputation, and 
taken as the keynote of currency legislation, there may be 
need of some practical demonstration of the fallacy of the old 
idea and of the validity of the proposition on which alone an 
effective reform of the currency can be based. 

Were a number of business men to combine for the purpose 
of organizing a system of exchange, effective among them- 
selves, they could clearly demonstrate how simple the money 
system can really be made. The greater the number of busi- 
ness men that would thus co-operate, the more complete would 
be their own emancipation from the obstruction to commerce 
and industry which existing currency laws impose. 

A practicable plan for employing any sound business credit 
as a medium of exchange may be outlined as follows : 

For the purpose of settling business accounts through a 
system of mutual clearance, societies of business men can be 
formed in their respective localities, and these bodies federated 
in a larger organization. The method of clearing accounts 
among members of these societies need differ in but a few 
details from the method at present employed by deposit banks 
for clearing checks. Each society would open an account with 
every one of its members, and any member desiring to use his 
own credit as a medium of exchange would, first of all, furnish 
thoroughly acceptable and amply adequate security for the 
amount of credit he desires to have mobilized. 

Neither the amount of this security nor any part of it is to 
be credited to the account of the respective member, but is to 
be held by the society as a pledge to cover "credit checks" 
which he is to be entitled to draw on the society in excess of 
any deposits that he may make to the credit of his account. 

Even though he makes no deposit of funds of any kind, but 
has furnished only the security above indicated, he is to be 
entitled to draw, within the limit of the amount for which his 
security has been accepted, credit checks which would be sub- 
stantially of the following form and tenor: 
27 



418 CONCLUSIONS [309 

The Credit Clearing Society of 

Credit John Smith or order with 

One Hundred Dollars. 

and charge to the Account of 

William, Brown. 

Such checks would be accepted by all members of the 
federated societies in payment of business accounts, and when 
deposited, would be duly credited to the depositors' and 
charged to the drawers' account. 

Besides credit checks, bankable funds, such as bank notes 
and bank checks, are to be accepted for deposit, but when so de- 
posited, the checks drawn against the account are to be only 
in the form of credit checks of the above description, to be 
used by the drawer in paying accounts due by him to other 
members of any of the federated societies. 

Since all business men have upon their books both accounts 
payable and accounts receivable, a clearance of the greater 
part, if not all, of this mutual indebtedness could readily be 
achieved by an extended application of this method. It is 
only necessary to follow the customary method of clearing 
bank checks. 

A brief illustration may conduce to a better understanding 
of the idea. A depositor, after furnishing acceptable security 
adequate to cover the credit he purposes to use, might during 
the first month pay out credit checks to the amount of, say, 
$3000, and receive in payment, in the course of business, a 
number of similar checks to the amount of $2500, which he 
deposits at his society. At the end of the month his account 
would be overdrawn to the amount of $500. He would have 
drawn against his security to that extent, and thus, for the 
time being, be debtor for that amount to his society, and in- 
cidentally to the entire clearance system. 

During the succeeding month he might send out checks to 
the amount of $3500 and receive $4200 in the form of similar 
checks from his customers. On depositing these, he would 
have a balance of $200 in his favor and thus be a creditor of 
this clearing system. If the bulk of his business had been 
transacted with members of the federated societies who had 



310] CURRENCY REFORM 419 

given and received such checks in payment, he would have 
needed in his business but little cash and would have been 
to that extent independent of the money market. 

It is manifest that under these rules a member could check 
out more than he deposits and thus become debtor of the 
clearing system, but this only up to the amount for which the 
security he furnished had been accepted. His credit is 
monetized or "mobilized" through the over-drafts of his 
account with the society, and to that extent addition has been 
made to the exchange medium of this system. As issuer of 
this additional exchange medium he became to that extent 
a debtor to the system. Upon subsequently reducing his in- 
debtedness by the deposit of credit checks received from other 
members, or of current funds, he correspondingly reduces the 
volume of his own mobilized credit and incidentally his in- 
debtedness to the system, A member depositing more credit 
checks than he has issued has evidently made no draft against 
any security he may have furnished and is, in fact, a creditor 
of the clearance system to the extent of his balance. 

The total volume of this medium of exchange, that is to 
say, of the credit so mobilized, would automatically adapt 
itself to the business requirements of its members. It would 
expand whenever a member overdraws his account — ^within 
the limits of his security, of course — and it would contract 
whenever an indebted member reduces his indebtedness by 
deposits. 

It is obvious that such a system could easily be inaugurated 
with but a few provisions for its maintenance and to guard 
against abuse. 

310. Ways and Means of the System. — The cost of con- 
ducting such a business would be mainly that of the services 
of its employes and of such incidentals as are requisite to the 
conduct of the business. Another item to be considered would 
be the possible losses through exceptional depreciation of 
some of the securities. To cover these requirements, monthly 
assessments would be made on the members of the association 
which, at least at the beginning, should be proportionate to 
the amount of their indebtedness to the society, in other words, 



420 CONCLUSIONS [3ii 

in proportion to the extent to which their individual credit has 
been monetized for them by the association.^"^ 

The rate of these assessments should at first be rather in 
excess of the estimated requirement, with a view of gradu- 
ally accumulating a reasonable surplus fund in preparation 
for contingencies. This rate should be revised from time to 
time so as to adjust the income to the necessary outgo. Inas- 
much as the object of the societies would be the facilitating 
of exchanges and not the making of profits, it would naturally 
be undesirable as well as unnecessary to accumulate more than 
a limited surplus fund. 

Inasmuch as the assessments on the debtors of each society 
are to be adjusted to cover not only necessary expenses, but also 
any losses arising through exceptional depreciation of pledged 
securities, it follows that each society would be incidentally 
a mutual credit insurance company. The solidarity of respon- 
sibility thus effected would maintain the credit of the societies 
upon the highest plane at all times. 

The various local associations would naturally accept all 
credit checks issued by members of any of the federated so- 
cieties and would clear them as checks are cleared by deposit 
banks. Unauthorized credit checks, or cheeks exceeding the 
credit of the drawer would, of course, be treated as unauthor- 
ized bank checks and overdrafts are now treated by deposit 
banks. 

311. Payment of Individual Balances. — In the practical 
working of a system such as here proposed, the process of 
clearance cannot be expected to work out to exact balances. 
Some members will receive a larger amount in credit checks 
than they can use in payments to their fellow members, and 
their credit balances will correspondingly increase. Others 
will pay out more credit checks than they receive and accord- 

*°* In the light of former conclusions ( 301 ) it would appear im- 
proper that the cost of conducting the business should be borne by 
those alone who are drawing upon their credit in the operation of the 
system, inasmuch as those wiio, for the time being, are not using their 
own credit, are getting the benefit of the clearance system as well as 
the others. But so long as bank depositors generally get their checks 
cleared without cost to them, those members of the clearance system 
who would have no occasion to have their own credit monetized should 
be given the same advantage. 



312] CURRENCY REFORM 421 

ingly have an increased debtor balance. To adjust these 
differences, some such means as the following would be 
required. 

The creditor members, namely, those whose deposits of 
credit checks exceed their drafts, must be entitled to obtain 
cash from the society to the extent of their credit balances. 
The cash necessary for this purpose has naturally to be looked 
for from those who issued more credit checks than they de- 
posited and who, through the monetization of their credit, 
have become debtors to the system. In order that this cash 
may come in systematically, the debtors would be required to 
deposit, within stated intervals, say monthly, a certain amount 
of cash proportionate to the amount of their overdrafts. Thus 
a member whose debtor balance at the end of a month amounts 
to, say, $2000, when the monthly assessment of cash required 
to meet the calls for payment of credit balances is twenty 
per cent., would have to deposit at least $400 in cash during 
the ensuing month. 

These cash deposits would virtually constitute instalment 
payments of the indebtedness incurred, but this indebtedness 
could of course be renewed through a further issue of credit 
checks within the credit limit of the issuer. The rate of assess- 
ment, or * ' cash rate, ' ' would be adjusted from time to time to 
correspond with the demand for cash payment of credit bal- 
ances. But while this rate may readily be adjusted so that 
in the average the amount of cash received meets the calls for 
payment of balances, these receipts might at times become 
inadequate, and this contingency must also be provided for. 

312. Deferred Payments. — In case that demands for cash 
payments of credit balances surpass the amount of cash on 
hand, a temporary postponement of the payments can be 
provided for in a way similar to that suggested in the case of 
gold redemption (296-297). Accordingly, a member who de- 
posits a larger amount of checks than he pays out in the course 
of his business and who desires his credit balance, or a portion 
of it, paid in cash, might have to wait some days after enter- 
ing his demand, before it could be met. In such an event the 
monthly call on debtors for cash, that is, the "cash rate," 
would, be increased to a point which would adjust the cash 
income to the required amount, and so enable a resumption 



422 CONCLUSIONS [312 

of balance payments on demand. But, on the other hand, the 
debtors should be protected against an unexpectedly heavy 
demand for cash. If the rule were made that the monthly 
cash rate shall never exceed 50 per cent, of the debt balance, 
the delay of payment, in the event of a simultaneous presenta- 
tion of all outstanding credits, would amount to somewhat 
over two months. A limit of, say, three months for the 
maximum delay of balance payments could be adopted to 
surely cover the theoretically most unfavorable case, a case 
corresponding in the present banking system with a simul- 
taneous demand for withdrawal of all deposits, which, as is 
well known, could never be met, and is never taken into 
account as even a possibility. 

Members having credit balances would, accordingly, have 
the right to demand payment of those balances, with the 
understanding that, if need be, the society may avail itself 
of a period of grace never exceeding three months. In prac- 
tice such occasion would rarely, if ever, arise, and if it did, 
the delay would probably never exceed one or two weeks, ex- 
cept, perhaps, during the initial stage of the organization. 
Those accepting payment in credit checks would, of course, 
do so with a full knowledge of this provision. 

Such possible delays in the payment of credit balances 
may appear, at first sight, to be a serious objection to such a 
system. But upon further consideration it will be found to 
be of trifling consequence, as compared with the conditions 
now actually prevalent in business. Members accepting credit 
checks would, as a rule, be able to use the credit they represent 
for paying some of their accounts, and only exceptionally 
would they require their balances exchanged for currency. 
Moreover, once the system is more or less extensively adopted, 
any delay in balance payment that might arise would seldom 
exceed a week, and as it would be perfectly reasonable for 
members to insist on payment of their invoices within ten 
days of their date if paid by credit checks (340), and equally 
feasible for debtors to pay by credit checks within that time, 
this period, added to the possible delay of balance payment, 
would probably never exceed one month, a time which is now 
customary in business generally. Anyway, the likelihood of 



313. 314] • CURRENCY REFORM 423 

such delay would fall away entirely soon after the system was 
fairly in operation. 

313. Issue of Notes. — Nor can there be any objection to 
broadening the scope of the system by having the federated 
associations issue notes for circulation among the members, 
thus taking the place of currency. These notes would be 
issued to any member in exchange for credit checks at the 
office where he deposits, and if presented for redemption by a 
creditor member of any of the societies, at the place where he 
is a depositor, would be redeemable in actual currency on the 
same conditions on which credit balances are cashed. 

Inasmuch as redemption could be demanded, not by any 
bearer of the notes, but only by a member who is himself at once 
a depositor and a creditorof the system, and furthermore, inas- 
much as redemption would not be specifically promised on 
demand, but be subject to certain limitation as to time, these 
notes would not be money in the legal sense of the term and 
would therefore not be subject to the present prohibitory tax, 
but would nevertheless serve all the purposes of a medium of 
exchange within the circle of the association membership. 

In order that the field in which these notes can be utilized 
may be still further enlarged, the various societies might 
accept non-depositors as "associate members" on a stated 
initiation fee. These associate members would then be in a 
position to accept such notes and pass them to other members, 
although they could not have them redeemed, except through 
a regular creditor member. In this way even wage earners 
could use these notes. This would materially increase the 
chance of cancellation of accounts and would correspondingly 
decrease the need for cash for the clearance of credit balances. 

314. Advantages of the System. — While the system of 
clearing accounts here proposed would reach its fullest effi- 
ciency only when employed by the business world in general, 
it yet could easily be inaugurated with advantage through the 
co-operation of a comparatively small number of business 
houses. Such an institution, when once in operation, would 
afford advantages to its members which would sooner or 
later induce all progressive business men to join. The ad- 
vantages in question may be briefly recapitulated. 



424 CONCLUSIONS [314 

The most obvious benefit would be the greater facility 
afforded for the settlement of business accounts. Through 
the medium of the institution the credit of the individual 
business man could be utilized as though it were money, so 
far at least as relates to dealings with members of the affiliated 
societies, and no arbitrary regulation could put a limit to this 
use of credit. And yet an undue expansion of this medium 
of exchange could not occur, as its volume would depend on 
the willingness and consent of creditor members to carry bal- 
ances. Whenever the balance of a creditor member of any 
of the societies exceeds the amount he can use in his business, 
he would naturally have the excess redeemed in currency. In 
this way debtor members would be brought to reduce their 
indebtedness by cash deposits. The volume of this medium of 
exchange would thus automatically adapt itself to the needs 
of business. 

The system would, of course, not be free from all cost to 
the participants. It would cost something to keep the or- 
ganization going, and, as has been shown before, this cost 
would be collected in the form of charges against the debtor 
members. But though these charges would be analogous to 
interest, their amount would be below the current interest 
rate, at least to the extent of the item of pure interest now 
paid as part of the charge for current interest or discount. 

Other advantages would follow incidentally. Under such 
a system of clearance prompt payment of accounts by credit 
checks could reasonably be demanded by every member from 
every other (340). Any delay in such payment would be an 
acknowledgment of lack of resources, and being thus virtually 
an admission of financial weakness, would be a warning against 
a further extension of credit to the delinquent. Questionable 
debts would not accumulate ; the current custom of extending 
credits on the basis of supposed assets would cease, and the 
present method of settling accounts with promissory notes, 
when the amount of such notes already afloat is known only 
to the maker, would become obsolete. The conduct of business 
with an excessive proportion of liabilities would become almost 
impossible, and disastrous business failures, which are the con- 
sequences of excessive liabilities, would be correspondingly re- 
duced. 



CHAPTER XVII 

EFFECTS OF CURRENCY REFORM 

315. Direct Results. — The currency system proposed in 
the foregoing chapter cannot be said to be a radical departure 
from well established principles. There is not a single feature 
among the proposed details that has not in some way or other 
stood the test of time. Under this system every currency 
note would remain, as it is now, an acknowledgment of debt, 
doubly secured. The gold standard would continue to be 
maintained through redeemability of the notes in gold (292- 
297), The use of bullion instead of specie as money is even 
now the current practice in international settlements (85). 
A temporary delay in gold redemption in case of emergency is 
nothing new, and past experience has proved it to have no 
influence on the value of the notes if the postponement is not 
of an indefinite period (296). The purpose of the proposed 
reform is the removal of that obstruction to the freedom of 
exchange which is being maintained because of the fear of an 
imaginary danger (239-240). 

The proposed alternative in the form of a system of mutual 
clearance of commercial accounts differs from the present 
bank check system only in a few details and, regarded from a 
simply economic standpoint, the differences are merely in 
degree. The principal change is that of materially reducing 
the proportion of the reserve fund of legal money, made feas- 
ible by the provision for a brief postponement, in case of 
emergency, of the exchange of legal money for credit checks. 

But as regards the effect which the proposed currency 
reform would doubtless have upon the industrial world, and 
upon society generally, far-reaching changes for the better 
would certainly follow. When the supply of currency is 
allowed freely to respond to every demand that is supported 
by the tender of adequate security, and the issue is not ham- 
pered by a needless tax, competition among lenders will bring 

425 



426 CONCLUSIONS [316 

about a reduction of the interest rate to a point where this 
rate will cover only the value of actual services rendered. The 
item of pure interest will be practically eliminated from gross 
interest (327), as a natural consequence of the freedom of 
competition and the doing away with the impersonal monopoly 
of money. This condition would be realized as rapidly as 
the currency reform is put in operation and the additional 
currency brought into circulation. The beneficial effects that 
such a change would bring about in the general constitution 
of society can scarcely be estimated, but a few of the more 
salient results may be fairly prognosticated. 

316. Indirect Results. — ^When once money has lost its 
power to command pure interest, possessors of money or of 
credit capable of being monetized will naturally seek to invest 
their means in such industrial and commercial pursuits as 
still afford capital interest. These investments would take 
the form not only of enlargement of existing establishments, 
the starting of new enterprises and the full employment of all 
available labor, but also of such improvements in the methods 
of production as will enable labor to achieve its maximum 
efficiency. In consequence of that increase of capital by which 
the efficiency of labor is enhanced, the final efficiency of 
capital, and hence also its power to command an unearned 
income, will become lessened (195). 

These investments would naturally continue until the 
diminishing capital returns cease to offer sufficient induce- 
ments for the further monetization of credit and its invest- 
ment in business. At what point will this be the case ? "When, 
as we have heretofore found, the current rate of pure interest 
on money loans equals, say, C'e', Fig. 18, the amount of capital 
an employer can use to his best advantage is no greater than 
OC, and the amount of goods produced by a given amount 
of labor is represented by the area OC'e'E. But when the item 
of pure interest on money loans falls to a nominal rate, there 
need be no stint in the employment of capital goods, and the 
amount of capital that can be most advantageously employed 
will be increased to the point at which labor attains its maxi- 
mum efficiency, the point indicated at C in the diagram, the 



316] EFFECTS OF CURRENCY REFORM 427 

productivity being represented by the area OCE. At the same 
time, the final efficiency of capital, and accordingly also the 
rate of unearned returns of capital, finds its natural level 
at, or at least near, the vanishing point C. 

If the prevailing theories regarding interest were correct, 
this result would not obtain. According to these theories 
man is naturally averse to producing things in advance of his 
requirements. It is immaterial whether this aversion is ex- 
plained by regarding ' ' abstinence "or * * waiting " as an irksome 
effort, or by assuming that the strain of future productive 
effort is underestimated. This aversion, if it were as potent 
an economic factor as is assumed by these theories, would in- 
deed account for that insufficiency of capital which makes it 
impossible to employ labor at its maximum efficiency. And 
if it were true that the insufficiency of live capital could be 
traced to the insufficiency of capital goods in existence, a mere 
addition to the volume of money could not possibly supply 
more capital. 

The idea of an insufficiency of capital goods is however 
plainly at variance with actual facts. Why is it that the indus- 
trial world is so anxiously seeking for new markets for its 
excess productions ? Why is it that the business world is striv- 
ing to prevent, through the imposition of tariffs, the impor- 
tation of that supply of capital goods which would supple- 
ment their supposed insufficiency? Why are we periodically 
visited by conditions to which the term "overproduction" 
has been applied? Why is it that there is the great trouble 
of the unemployed ? If employers could readily obtain money 
at an interest rate that does not include a monopoly tribute, 
their demand for capital goods with which to increase labor's 
efficiency would become effective, and it is quite manifest that 
such demand would be duly supplied. Producers would no 
longer have any need to hunt for distant markets, as the home 
market would readily absorb all their productions, and unin- 
terrupted prosperity would follow. 

With the increase of capital employed in production, its 
final efficiency and, accordingly, its power of returning un- 
earned revenue, would diminish, as •already stated, and with 



428 CONCLUSIONS [317 

the consequent reduction of the incomes of the passive par- 
ticipants in production a greater portion of the value gained 
in the process of production must accrue to the active partici- 
pants. At first the increase would go to the employer alone, 
but this would induce a number of workers to compete by 
becoming employers. The demand for labor would correspond- 
ingly increase, with the result that wages would rise, so that 
in the end all active participants would obtain their shares 
according to the proportionate value of their respective 
services. 

This higher level of wages would be brought about by 
competition, the very factor to which low wages are erroneously 
ascribed by the socialistic school of economists, and would be 
permanent, for with the disappearance of the item I in the 
barren circulation of money (245-249), the cause of monetary 
crises and business depressions (271-276) would be removed 
once and for all. 

317. Unfounded Apprehensions. — A reform of the cur- 
rency system in the direction of greater freedom cannot be 
staved off indefinitely, since the fallacy of that theory of 
economics on which the prevailing objection to a natural expan- 
sion of the currency is based, is gradually being recognized and 
must ultimately give way to the truth. But the inevitable 
outcome of such a reform, the practical disappearance of pure 
interest, however salutary and beneficial to the community 
at large, will naturally be contemplated with alarm by many 
of those for whom the present system affords unearned gains. 
It has often been asserted that no one would save, if savings, 
when invested, would not return an income (205). In their 
effort to show that pure interest, the unearned profit of capital, 
is both just and necessary, leading economists have even de- 
clared that in the event of capital ceasing to obtain that profit, 
it would not be invested, but would be held back, leaving labor 
unemployed. They maintain that lack of employment would 
result from those very conditions which, according to our con- 
clusions, would definitely put an end to unemployment. How- 
ever, it is not difficult to show that their assumption is totally 
groundless. 



318, 319] EFFECTS OF CURRENCY REFORM 429 

318. Natural Inducements to Save. — Is it really true that 
the saving of wealth will cease when capital no longer yields 
a revenue to its owner ? This supposition is certainly not con- 
firmed by the conclusions to which our investigation points. 
According to these conclusions an increasing amount of means 
of production will be brought into use as the rate of interest 
on money loans falls (159). And were the rate of pure inter- 
est on money to vanish, the amount of capital employed would 
be increased to the point where labor attains its maximum 
efficiency. The employer would certainly seek to use that 
method of production which, under the existing conditions, 
yields the greatest returns with the least cost (205), and it is 
only the insufficient supply of money and consequent high 
rate of interest that now prevents the employment of that full 
complement of capital which enables labor to work to the best 
advantage. The desire to benefit from the increased efficiency 
of labor, the endeavor of the employer to increase the recom- 
pense for his own efforts, is an inducement to produce capital 
far more potent than the desire to get interest on capital ; and 
since the production of capital is possible only by the per- 
formance of work long before the fruit of that work becomes 
available for consumption, the inducement to produce capital 
is also an inducement to save. 

But apart from the advantage afforded by the use of capi- 
tal, there are yet other inducements to the accumulation of 
wealth (196). Men of prudent disposition seek to provide 
not only for their declining years, but also for unforeseen 
emergencies. They make provision for their families both by 
accumulating savings and by insuring their lives. The growth 
of the system of life insurance is a significant commentary on 
the theory that men prefer present to future wealth. Here we 
actually see men saving wealth which will never become 
"present" wealth for themselves, but only for their heirs. 

319. Inducements to Invest Savings. — The assumption of 
some economists that if it should come to pass that capital no 
longer commands pure interest, such savings as are made will 
not be invested in production, is also groundless. It is plain 
enough that capital goods in productive use would not be 
withdrawn therefrom, if for no other reason than that such 



430 CONCLUSIONS [319 

withdrawal would of itself render them worthless. A selling 
of the plant or equipment of a business is, of course, not a 
withdrawal of capital, but only a change of ownership. A 
withdrawal would ensue only if the owner of capital should 
use up in his living and thus dissipate the income he receives 
as recompense for the depreciation of the capital goods. If 
the income so received is not used up, but is saved and stored 
in the form of money instead of being applied to restore the 
capital as it wears out, this money, it will be remembered, 
has value only because it constitutes a claim to actual wealth 
which is in possession of the issuer of the money and which 
is presumed to be in use as capital. The capital represented 
by that money is accordingly invested capital, and the with- 
holding of the money from use does not constitute a withhold- 
ing of capital from active employment. 

It is true that under present conditions the hoarding of 
money has the effect of restricting the activity of labor; not, 
however, through a withdrawal of capital, as it is usually desig- 
nated, but by diminishing the medium of commerce which, 
as it is, exists in insufficient quantity. Hoarding of money 
simply aggravates the evil effects of our faulty currency laws. 
Once the undue limitation on the use of credit as a medium 
of exchange is removed, the hoarding of money would be of no 
consequence to the community at large, as the present hin- 
drance to the turning of idle into active capital would no 
longer exist. 

The apprehension that unemployment would follow the 
shrinking of pure interest is to be traced to a prevailing mis- 
conception as to the causes of involuntary idleness. We need 
only place before our mind the process by which invested capi- 
tal would lose its power to command pure interest. The first 
effect of a thoroughgoing currency reform being a reduction 
of the interest commanding power of money, the investment 
of money in industrial undertakings would be stimulated, as 
already said (155-162), and this would in turn result in a 
reduction of the interest commanding power of capital goods 
used in production. An increase of the amount of capital in 
productive use would accordingly precede, in fact, be the 



819] EFFECTS OF CURRENCY REFORM 431 

cause of, the decline of the interest commanding power of 
capital goods. This again brings up the question as to how 
low the rate of capital interest is likely to fall before it ceases 
to be an inducement for further investments. 

The investor naturally takes into consideration the risk 
he runs of losing a part or all of what he ventures. This risk 
exists in endless forms. Articles of manufacture may become 
obsolete. Machines not only wear out, but may be superseded 
by new inventions. Insurance in its various phases does not 
afford complete assurance against possible losses in business. 
The reluctance to assume such risks accounts for a limitation 
of capital investments and prevents capital returns from 
falling below the point where these contingencies are fully 
covered. 

Whether this point will ever be reached in practice, or 
whether an increase of investments will be halted before it is 
reached, leaving the chances of gain still to overbalance the 
chances of loss, must be left for the future to determine. It 
is not inconceivable that the impulse to the making of further 
investments would cease before returns from invested capital 
fall to the point of its mere insurance and maintenance, so that 
an item of pure capital interest would still be left as part of 
the average income from invested capital. But so long as there 
remains an average profit, however small, it is more likely 
that the investment of savings would continue in preference 
to keeping them idle, and that in the end this remaining profit, 
namely, the item of pure capital interest, would entirely disap- 
pear. The investor's recompense would then be the costless 
conservation of his savings, coupled with the chance of gain 
attended by an equal chance of loss. The getting of a regular 
unearned income out of accumulated savings would thus natur- 
ally come to an end, and the owner of wealth who does not work 
would simply have to draw on that wealth for his living. 

These conclusions apply of course only to purely passive 
investors. To the investor who is at the same time actively 
engaged in the work of organizing or managing the enterprise, 
or who applies in his investment more than ordinary judgment 
and foresight, there would naturally accrue a due return. But 



432 CONCLUSIONS [320 

such return would be in the nature of wages rather than of 
capital interest. 

"When the normal return of invested capital is reduced to 
its mere maintenance, and capital has no longer the power to 
gain for its owner a regular income not earned by him, students 
of economics will be relieved of one of the vexing problems on 
which the authorities are at odds, namely, the proper definition 
of "capital" (129). There would be no need for considering 
capital a distinct category of wealth. * ' Capital ' ' and ' * wealth ' ' 
would then be recognized as synonyms, and the use of the word 
in equivocal and misleading meanings would soon fall away, 
especially where the term is used virtually in the sense of 
''medium of exchange." This is the case when it is said 
that * * capital ' ' is needed for carrying out a certain enterprise, 
such as the building of a railroad or the development of 
natural resources. It is well known that the "capital" re- 
quired in such cases is money , and that this money is furnished 
almost entirely in the form of bank credit. 

Suppose a community requires a market-house and wants 
to build it without calling on capitalists for the means. If 
the work were undertaken by the community itself, the value 
created as the work proceeds could be applied as basis for an 
issue of currency, duly redeemable, with which to pay the 
workers. The community could thus effectively "finance" 
the enterprise, while at the same time the members of the 
community would be supplied with a medium of exchange that 
goes into circulation without the intervention of an agency 
to which a toll in the form of pure interest must be paid, not 
only at the start, but continuously thereafter. This has 
actually been done in the well-known and often quoted case 
of the Guernsey market-house ; and why the example there set 
has not been generally adopted is indeed difficult to understand. 

320. Opposition to Currency Reform. — There can be no 
question that a currency reform admitting of such an increase 
of the currency issue as will adapt exchange facilities to the 
effective demand would encounter opposition on the ground 
that it would work an injustice to the investor of capital. But 
such opposition can logically proceed only from one or the 



320] EFFECTS OF CURRENCY REFORM 433 

other of two standpoints. The pure interest which capital 
now commands is either natural and just, or it is unnatural 
and unjust. 

Let us first take the standpoint that pure capital interest 
is something natural, on the ground that: 

the rate of interest is not regulated by the abundance or scarcity of 
money, but by the abundance or scarcity of that part of capital not 
consisting of money j*"^ 

or that capital interest is the reward of "abstinence" or is 
due to a natural undervaluation of future as compared with 
present goods. In either case no change in the currency system 
could possibly affect the interest commanding power of capital, 
and opposition to currency- reform on the ground that it would 
work injustice to capital would be illogical. 

On the other hand, to concede that through a liberal reform 
of the currency system capital would be divested of its power 
to command pure interest would be tantamount to an admis- 
sion that this power of capital is unnatural and unjust, and 
opposition to such reform would be worse than illogical. 

Opposition may, however, proceed on still other grounds. 
There is a prevailing opinion that the only effect of an increase 
of currency would be that of deranging prices. This question 
has been discussed before (239a), but since the succeeding 
developments of our inquiry have thrown further light on the 
subject, we may briefly resume its consideration. 

So long as currency is redeemable in gold, the purchasing 
power of money can fall only by a lowering of the value of gold 
metal. The question therefore resolves itself into this : Would 
the proposed money reform have the effect of making the metal 
gold cheaper in comparison with other things generally ? 

When banks, by furnishing security to the government, 
can obtain, without charge or other limitation, money with 
which to replenish their necessary reserves, and so be inde- 
pendent of either the uncertain current of deposits, or the 
alternative of getting gold for the purpose, it is altogether 
reasonable to expect that quantities of that metal, now held 

"« Ricardo, p. 284. 
28 



434 CONCLUSIONS [S20 

in banks and treasury vaults, will be put upon the market. 
That this increase of its market supply would result in a fall 
of its value is self-evident and is illustrated in diagram Fig. 
11. As the amount OV becomes less, the value of gold will not 
remain equal to q'a', but will approach the rate qa (108). In 
other words, prices will rise. This can, however, have no 
worse effect upon business than does the rise of prices usually 
observed when activity returns after a spell of business stag- 
nation. Moreover, as this fall in the value of gold would be 
coincident with an abundant supply of gold in the market, 
an emergency requiring a delay of gold redemption under our 
proposed currency reform would hardly ever arise (296, 297, 
303a), It should be borne in mind that this fall in the value 
of gold would be due to the liberation of gold metal now stored 
as reserve fund, and not to any increase of the volume of cur- 
rency (239c). The value would therefore not fall in the 
same ratio in which the currency is increased, as the advocates 
of the volume theory maintain, but only to about the value that 
gold would naturally have, were it not used for monetary pur- 
poses. This rate is shown by the ordinate qa of Fig. 11. 

Those authorities who insist that a material increase of 
currency, regarded by them as "inflation" (341), must lead 
to a proportional increase of prices, reason on the theory that 
the value of money is governed by its volume, a theory which 
we have found to be baseless. The followers of this theory, 
propounded by classic authority, have endeavored to elaborate 
and fortify it without critically scrutinizing the premises on 
which it is founded. Under the influence of this school of 
economists this doctrine has been kept constantly in view 
in the enactment of our currency laws. The natural growth 
of commerce has been hindered through allowing ourselves to 
be guided by this misleading theory, whereby it is made to 
appear, as John Stuart Mill implies (2396), that an increase 
of the volume of currency would enrich the issuers of the addi- 
tional notes at the expense of the holders of the previous 
issues. In reality, the prevailing laws, instead of preventing 
"robbery," as Mill puts it, actually gives to possessors of 
money and other capital the power to ' ' levy a tax ' ' on industry 
and commerce. 



821] EFFECTS OF CURRENCY REFORM 435 

To the end of meeting every objection that may be urged 
against the introduction of the proposed currency reform we 
should also carefully consider the question whether this reform 
can be introduced without harmful effects in one country, 
while the present system of limitation is retained elsewhere. 
The first result would naturally be an extraordinary develop- 
ment of industrial activity, shortly followed by a rise of wages 
and a fall in the rate of capital returns. This reduction of 
profits would furnish an impulse to the investment of capital 
abroad where higher interest rates prevail. Foreign exchange 
would rise as a result to a point where the exportation of gold 
would become remunerative, and this would tend to deplete 
the country of its stock of gold (3036). This would seem to 
endanger the stability of the currency redeemable in gold. 
There need, however, be no fear of such a result, because the 
low interest rate that impels the exportation of gold would 
•at the same time favor the exportation of goods to such an 
extent that the payments for the excess of exported goods 
would soon reverse the flow of gold. 

The financial history of Great Britain during the nine- 
teenth century fully bears out this view. The rate of interest 
in that country was lower than in any other, and its export 
trade grew to unparalleled proportions, so that in consequence 
the gold market of the world became centred in the British 
metropolis. A relatively low interest rate was throughout 
that period coincident with an influx of gold. 

321. The Increasing Cost of Living. — For some time past 
the conviction has been growing in the public mind that many 
of the existing industrial ills are traceable to defects of our 
monetary system. Many observers have become persuaded that 
the fault lies mainly in the instability of the value unit. The 
universal rise of the "cost of living" has of late attracted 
much attention and widespread discussion. 

While a number of contributory causes have been at work 
to raise the cost of living, the principal cause is no doubt to be 
found in the vast improvements made in the metallurgy of 
gold. Through the introduction of the cyanide process gold 
is now obtained with less labor and cost than formerly. The 
consequent loT^erjiig of the supply curve SS' of Fig. H a,ccounts 



436 CONCLUSIONS [322 

at once for a lowering of the value of gold. "Where gold is the 
standard commodity, a general rise of prices is the inevitable 
consequence. 

Among the various propositions directed toward estab- 
lishing a value unit that shall be practically independent of 
the value fluctuation of any single commodity, the one most 
frequently considered is the establishment of a composite unit 
(31). In discussing the difficulties of introducing such a unit 
(111), we had not yet reached a point where we could properly 
deal with a project based on the idea that the value of money 
varies inversely as its volume, other things remaining equal. 
That project has been devised with the idea of maintaining 
the market value of the schedule of commodities composing 
the standard at a designated sum, say, one hundred dollars, 
by the following method. The comptroller of the currency, 
or some like authority, is to compute, from the daily market 
reports, the current price of the schedule list of goods. When-* 
ever this total shall be found to be greater or less than the 
prescribed sum, he is to withdraw or to emit currency, as the 
case may be. It is supposed that prices will thereupon obedi- 
ently fall or rise, as the volume of outstanding notes is reduced 
or increased, restoring the value of the scheduled list of com- 
modities to its prescribed sum. But, as we have learned (115- 
125), this result would not ensue; hence the experiment would 
necessarily end in failure. 

322. A Real Source of Danger. — The desire to establish 
an invariable standard of value takes a more dangerous turn 
in the proposal to establish a value unit that shall be inde- 
pendent of any commodity whatever. For some reason, the 
belief that legal-tender notes need not be redeemable at all, but 
that they are invested with value by the fiat of government, has 
gained considerable acceptance (97&). The advocates of this 
notion propose to issue legal-tender notes and simultaneously 
to abolish any and every commodity standard, maintaining 
that in this way an invariable value unit can be established. 
But as such notes would not be redeemable in any definite 
quantity of a specified commodity, they could not be certifi- 
cates of a definite debt, and accordingly could not possess any 



322] EFFECTS OF CURRENCY REFORM 437 

definite value (97a). Any attempt to put this idea into 
practice would surely add another to the many failures of 
projects of this kind recorded in history. 

"When men like Law and Mirabeau obtained the power to 
carry out their schemes, they flooded their country with fiat 
notes which at first circulated on basis of the popular belief 
in their validity. But they soon depreciated, and finally their 
worthlessness became generally recognized, precipitating the 
country into ruin and misery. Instead of a blessing, these 
issues became a curse. 

These and similar failures are frequently ascribed to 
''inflation," that is, to the issue of more money than was 
needed, while in reality they were due to the fact that these 
notes were in no way redeemable. Whenever currency notes 
are put into circulation, the issuing power obtains things or 
services for mere pieces of paper, or at most mere promises 
to pay. The issuing authority should therefore be considered 
as having obtained a loan, and unless it is made responsible 
to pay this debt in the end, no one else can be expected to do 
so in its behalf. 

The ' ' fiat ' ' notion of the value of money is a twin brother 
of the volume theory. Both ideas are based on the untenable 
proposition that the value of money is due to the demand that 
exists for a medium of exchange (115). The disastrous ex- 
perience of "wild-cat banking" (103&) is no doubt to be 
attributed principally to the prevalent acceptation of the fiat 
theory. The American bankers of the middle of the nine- 
teenth century misinterpreted the experience of the gold- 
smiths of past centuries (103a). Imbued with the notion that 
the notes they were issuing possessed value because they sup- 
plied a demand, these bankers considered that nothing more 
than a small coin reserve was necessary to sustain their value. 
Under this erroneous impression many banks dissipated their 
assets, and when the time of reckoning came they were unable 
to meet their obligations and failed. 

The advocates of both the volume and the fiat theories often 
point to our past experience with greenbacks and the similar 
experience of a number of European nations with depreciated 



438 CONCLUSIONS 1^23 

currency as a proof that the value of the "money unit" is 
independent of the value of either gold or silver or any other 
commodity that may be adopted as a standard of value (112), 
taking as evidence the fact that specie rose to a premium dur- 
ing the period of the irredeemable greenbacks and disappeared 
from circulation. That the phenomenon can be satisfactorily 
explained without recourse to the phantastic notion that value 
can inhere in money consisting of nothing more than pieces of 
paper legalized to serve as money has been shown before (96) . 

323. The Land Question. — In our analysis of the factors 
which come into play in the determination of land values we 
were unable to bring the study to a final conclusion (185), 
since at that point the causes of the interest-returning power 
of money and capital had not been traced. In the light of 
our subsequent conclusions we may now proceed to give the 
land question final consideration. 

Eent, in the economic sense, being the share of the net 
income of productive groups which normally accrues for the 
use of the land, is determined, as will be remembered, by 
deducting from the market value of the produce of a produc- 
tive group all costs of production apart from any charge for 
the use of the land (173) . The process by which rent is deter- 
mined was illustrated by the diagram Fig. 20, and may be 
briefly reviewed as follows : 

Since the different elements making up the total supply of 
a given commodity are produced in different localities, their 
production and transportation to the market require varying 
expenditure of labor and capital. By arranging the different 
elements of the supply in a rising series of cost, we obtained 
the curve S8'. The conditions of demand being represented by 
the curve DD', it Avas shown that normally the quantity brought 
to market equals Oq, and the value adapts itself to the 
ordinate qa. The element q\ for instance, is produced at a 
cost equal to q's' and has a market price equal to q'r'. The 
user of the land from which this element comes is therefore 
able to obtain in the market a service equal to q'r' in exchange 
for a service equal to q's', gaining a profit equal to s'r', which 
is ''rent." 



324] EFFECTS OF CURRENCY REFORM 439 

When the diagram was applied to the question of wages, 
and the curve 88' represented the price limit from the stand- 
point of the workman, that is, his earning capacity in his alter- 
native occupation, that of his second choice, the fact that the 
liinit of any one of the intra-marginal producers was below 
that of the marginal one did not and could not imply that the 
personal service rendered by this intra-marginal producer was 
less than that rendered by the marginal one. It only indicated 
that the degree of his capacity in his occupation of first choice 
materially exceeded his capacity in his occupation of second 
choice. But when the diagram is applied to the question of 
rent, the differences between the various ordinates represent 
actual differences in the measure of effort expended, or of ser- 
vice rendered, by the users of the different plots of land in the 
production of equal quantities of produce. Any user of intra- 
marginal land, say of the land which yields the element located 
at q', when he sells his produce obtains in the market the 
greater service q'r' in exchange for something which requires 
for its production the lesser service q's', and the excess s'r' — 
namely, the rent — is furnished by those who, owing to the 
circumstances of the case, must produce and pay this excess 
(180, 329). 

That the surplus sV is primarily acquired by the user of 
the land, and, if the user is not also the owner, subsequently 
by the owner, has been shown before (171). 

324. The Right of Land Ownership. — The right to 
acquire the rent is universally conceded to the landowner. 
There is, however, a duty imposed upon him, namely that of 
paying the land tax, and, as we have already seen (184), 
through this tax he is obliged to share the rent with the 
community in a certain proportion. But he retains the greater 
share for himself, and our next task is to find the basis of his 
right to that share. We know that he is the owner of the 
land by virtue of a communal concession. But what is he 
doing to earn the share of the rent which he retains? Is he 
returning an equivalent service? Has he done aught that 
justly entitles him to this revenue, or is the community making 
him a gift of it? 

Falling back on fundamental premises (21), we must re- 



440 CONCLUSIONS [325 

gard the right of private ownership of land as a right of 
exclusive possession or control which exists by virtue (1) 
of the tacit consent of the community to leave the owner in 
possession, and (2) of the effective protection of that posses- 
sion by the community. The owner of land thereby acquires 
an advantage, in so far as the products of intra-marginal land 
have a value that yields not only a return for the effort of 
production, but also a further return in the shape of rent, 

325. Land Laws Examined. — Whether the right of pri- 
vate land ownership is equitable or otherwise may be exam- 
ined through a comparison of the rights and duties involved 
(20). 

The benefit which the landowner derives from the owner- 
ship of land is rent. This being primarily derived from the 
community at large, the only return required of the land- 
owner which can be considered as a duty is his obligation to 
pay such tax as the community levies on the land. The right 
and duty can be contrasted as follows: 

The right of the landlord accords him the re7it, while his 
duty is measured by the land tax he is obliged to pay. Con- 
versely, the right of the community consists in realizing the 
tax, and its duty consists in protecting the owner's exclusive 
right of possession and use, which includes the right to sell 
the products of the land at their market value. Since the value 
of products obtained on intra-marginal land exceeds the cost — 
in other words, the value of the service — of their production, it 
follows that the community, in buying those products, gives a 
greater service, represented by gV (Fig, 20) in exchange 
for a lesser service, measured by q's, the excess s'r' being rent. 

In our former analysis (184) we found that the tax levied 
on land is but a comparatively small portion of the rent. Ac- 
cordingly, the landlord obtains from the community something 
of which he gives only a fractional part in return. The com- 
munity gives something for which it obtains less than an 
equivalent. This is true whether the rent is of agricultural, 
of commercial, or of industrial origin. The principle remains 
the same. It follows that the service obtained by the 
landowner by virtue of his right has a value greater than the 



326] EFFECTS OF CURRENCY REFORM 441 

service rendered by him as a duty. Conversely, the service 
which the community renders to the landlord as a duty has a 
value greater than the service which it obtains as a right. 
Right and duty, in the case of land ownership, are not evenly 
balanced. Hence the present form of land ownership, in so 
far as it embraces the right of the owner to keep for his own 
use a portion of the economic rent, is in principle clearly 
inequitable. 

This inequity becomes strikingly apparent where the land 
is leased to a tenant. In that case the landowner ceases to be 
the user of the land, but still gets the surplus of the service 
rendered by the community over the service rendered by the 
tenant. Although doing nothing more towards establishing 
and maintaining the right exercised by the tenant than any 
other member of the community, he yet continues to get the 
difference between the value of the right — the rent — and the 
cost of the duty — the tax. 

In studying the composition of productive groups (143) 
we considered the owner of the land which was used by such 
group to be one of its members, performing a service for 
which he receives the rent. We now find that this service is 
not really performed by the landowner, but by the community 
in general. In an equitable state of affairs this rent should, 
accordingly, go to the community and not to the landowner 
(368). There is evidently a certain measure of inequity 
involved in the present system of land tenure. 

326. Land Ownership a Vested Right. — That the system 
of absolute land ownership is essentially inequitable has been 
recognized by various thinkers since the time of Moses, whose 
ordinance of the Jubilee Year was calculated to remedy the 
injustice. Similar considerations form the basis of the plan 
of land tenure known as the "single tax" system. However, 
this plan is regarded by many as embracing an element of 
injustice similar to that which it is intended to correct. The 
imposition of a tax on land equal to the economic rent would, 
according to Henry George, have the effect of reducing land 
values to nil, or, as he puts it, confiscating land values (359- 
360). A reform entailing such loss on landowners would 



442 CONCLUSIONS [326 

naturally be resisted by them. Land ownership is a vested 
right acquired by owners from the community and assured to 
them by law. When land first became private property, it 
was in most cases no-rent land, and as such had practically no 
value. The value which land now possesses, apart from the 
value of the improvements produced by labor, has been 
acquired by land in the course of time. Why, it may be asked, 
should the present owner be deprived of the value which the 
land has acquired through centuries, when this value has arisen 
without cost to anybody? 

It is this last supposition which is open to question. While 
it is indeed true that land value has arisen without a direct 
cost to anybody, this increase of value has been coincident 
with and due to a burden which the community has taken upon 
itself. Land has acquired its value only as it has acquired the 
capability of yielding rent, and, as we have seen, rent is what 
is left of the value obtainable from the land after all costs of 
producing this value has been covered. This rent is paid by 
the community, whether through payment for cabbages pro- 
duced on the land, or for convenience of shopping in the centre 
of a business district, or for the luxury of a seat in a theatre. 
Through the purchase of the products of intra-marginal land 
the community contributes to the owner of the land a revenue 
which he gets without returning to the community more than 
a portion in the form of land tax. That which remains to him, 
when capitalized at the prevailing interest rate, stands as the 
value of land. The community is in fact paying what is 
analogous to interest on a debt equal to the value of the land 
( 329 ) . The right of land ownership, as it stands now, is clearly 
a remnant of the feudal ages which enables the landowner to 
obtain from the community an income which he does not earn. 

It is, however, easier to point out the inequity of the exist- 
ing system of land tenure than it is to formulate a practicable 
plan for correcting the injustice. The right to the exclusive 
possession of land is necessary to induce men to cultivate it, 
to improve it, to place buildings on it. It often takes years 
before the full benefit of labor bestowed on land can be realized. 
Justice demands that this benefit be assured to those who make 



327. 328] EFFECTS OF CURRENCY REFORM 443 

the improvements. Unless lie who cultivates or otherwise 
improves the land is protected in the ownership of the fruit 
of his labor, our civilization must fail. Unless a reasonable 
remedy is instituted, the cure may he worse than the evil. 
Such remedy must have the effect of depriving the landowner 
of the right to get something for nothing, but must leave to 
him the full benefit of his own effort in utilizing the land. 

327. Bearing of Currency Reform on the Land Question. 
— However involved the problem may appear at first glance, 
it will be found, upon closer examination, that with the money 
monopoly abolished, no radical change in the system of land 
tenure would be necessary to work it out. 

Our analysis of the causes that determine the value of land 
shows that the yearly gain yielded by land, consisting of rent 
plus increment, R -\-TJ, is divided into two parts, T and I, 
of which T goes to the community in the form of land tax, 
while the remainder I is retained by the landowner. "We also 
found that these two parts are related to each other in the 
proportion which the actual rate of taxation t (182) bears to 
the current rate of interest i (184). 

It has been shown (315) that with the removal of existing 
monetary restrictions the current rate of pure interest would 
fall to nil, and, according to the rule by which the division of 
the gain derived from the ownership of land is determined, 
as stated above, the land tax T paid to the community would 
increase until it equals the entire gain E -{-TJ yielded by the 
land. The portion I left to the landowner would accordingly 
diminish to the vanishing point. Thus, with the abolition of 
the money monopoly the inequitable feature of the present 
system of land tenure would automatically fall away, inasmuch 
as that which would be returned to the community in the shape 
of tax would fully balance that which the landowner gets 
without earning it (371). 

328. A Concrete Illustration. — The process by which these 
results would come to pass may be readily understood if pre- 
sented in the form of a concrete illustration. 

Let us first take the case of a piece of land which has been 
returning an annual rent of $900, and the value of which has 



444 CONCLUSIONS [S28 

remained unchanged during a number of years. Let us also 
assume that the actual tax rate (182a) is 2 per cent. 

Supposing that the current rate of interest on fully secured 
loans had been 4 per cent., the value of this piece of land would 
have been $900 capitalized at 4 -f 2, that is, 6 per cent,, which 
would come to $15,000 (183). The tax was accordingly $300 
and the landowner's share $600, This land therefore repre- 
sented an investment returning a net income of 4 per cent. 

This would not continue under the operation of a currency 
system by which money and capital goods would lose their 
power to command pure interest. It is clear that the demand 
for land as an investment would then be greater than the 
supply, for land would be in demand as the only form of 
capital bringing a net return, while the supply would cease, 
since the landowners would not exchange their paying invest- 
ment in land for money or capital goods that do not bring a net 
return. This excess of demand would naturally cause land 
values to rise (360). But how far would they rise? 

Let us assume that as much as $30,000 was bid for the 
piece of land in question. In the case of a sale at that price 
this would be followed by a corresponding increase of its assess- 
ment. The annual tax would then amount to $600, leaving 
for the owner of the land a clear profit of $300. This land 
would then still be a profitable investment, while money and 
capital goods would not command pure interest, and conse- 
quently no unearned profit. Competition for the possession 
of this land would then tend to raise the value still higher. 
Since competition for the possession of land would continue 
as long as it affords a revenue not afforded by money or by 
capital goods, the bidding would go up as high as $45,000, 
when the 2 per cent, tax v/ould absorb the entire economic 
rent of $900, bringing the income from investments in land 
to a par with that from other capital investments. 

Now let us suppose furthermore that the piece of land in 
question not only returns an economic rent of $900, but has, for 
some years past, shown a yearly increment in value of $300. 
This will make the expected gross gain $1200, and the value 
of the land would naturally be greater than in the preceding 



828] EFFECTS OF CURRENCY REFORM 445 

ease. Beginning again with an initial condition of current 
interest at 4 per cent., a tax rate of 2 per cent, and the value 
of the land at $20,000 (1826), the tax T would be $400 and 
the net income I of the landowner $800, or 4 per cent, of the 
investment. With the elimination of pure interest from the 
returns of other forms of capital, competition for the land in 
question would raise its value, and thereupon the tax on it, 
until the value reaches $60,000, making the tax $1200 and 
leaving no net gain to the landowner. 

We have here been basing our deductions on the assump- 
tion that the increment as well as the rent is a given quantity. 
But our figuring shows that under the assumed circumstances 
the increase of land value would go on very much faster than 
the rate assumed. We had assumed $300 to be the normal 
yearly increment of the value of the land in question, assumed 
to be due to an increase of rent, and our illustration shows 
that within a comparatively brief period the value of this 
land would rise from $20,000 to $60,000, and this even inde- 
pendent of that increase of rent which is ordinarily the cause 
of the unearned increment. But this phenomenal advance in 
the value of land would be the outcome of extraordinary eco- 
nomic changes, characterized by the gradual disappearance of 
pure interest. This rise of value would come to a halt when 
the period of transition is past, and a further increase would 
thereafter take place only if the rent or the normal increment 
were greater than above assumed, or the rate of taxation were 
to be reduced. 

The results shown in the above illustrations do not conflict 
with the law of land value heretofore stated, our deduction of 
that law having necessarily proceeded without taking into 
consideration possible extraneous influences, such as a fall in 
the rate of interest to the point of disappearance of the pure 
interest item. 

It is of course altogether probable that an extraordinaiy 
increase of land values would be attended by great speculative 
activity which might even enhance them beyond the level of 
the final adjustment. In that event a reaction would set in 
after the current rate of interest has found its lowest level. It 



446 CONCLUSIONS [329 

can safely be predicted that when land values have become 
finally adjusted, the tax on land would have risen to a point 
where rent plus increment, B -\- U, goes to the community, 
supposing, of course, the assessment of land values being 
properly made. Such return of rent is the principal aim of 
the single-tax propaganda, but would be brought about auto- 
matically by the far more comprehensive reform of removing 
the existing arbitrary impediment to the freedom of production 
and exchange (364). 

329. Land Values Tantamount to a Public Debt. — From 
the above it is plain that a reform of the currency in the 
direction here proposed would have a controlling influence on 
the conditions of land tenure, inasmuch as it would have 
the effect of equalizing the duty of the landowner with the 
right enjoyed by him. Such land as has a comparatively stable 
value and which promises no unearned increment would nor- 
mally have a value on which the land tax equals the economic 
rent ; and where there is reason to expect the value to rise or to 
fall, this expectation would be reflected in the value of the 
land being greater or less than the rent capitalized at the rate 
of taxation, so that the amount of the annual tax would be 
above or below that of the economic rent to the extent of the 
expected annual increase or decrease of the value of the land. 

We may again reiterate that where actual facts are at vari- 
ance with the theoretical conclusions derived from economic 
laws, these variations are to be attributed to chance factors, 
just as the scattering of the shots of our illustration (1) is due 
to the unsteadiness of the marksman's aim. We have found 
that land values exceed the capitalized rent only if a rise 
in the value of the land is anticipated by the competitors for 
the purchase of the land, hence the tax would in general differ 
from the rent by the anticipated advance or decline of land 
value. If through some unlooked-for occurrence the actual 
increase or decline in value is greater or less than expected, 
our conclusion that the difference between tax and rent equals 
the increment or decrement, as the case may be, would to that 
extent be at variance with facts. Where there is a uniform 
change of conditions, such as a gradual rise of the rent due 



329] EFFECTS OF CURRENCY REFORM 447 

to a steady increase of population, or to a gradual diminution 
of the current interest rate, the increase of land values from 
year to year is correspondingly uniform, and the expectation 
of that increase, based on past experience, is usually realized. 
But if changes out of the ordinary take place, the actual 
advance or decline of land values will not agree with the antici- 
pation. It is reasonable to assume that ordinarily such adven- 
titious influences are as likely to affect land values one way as 
another and that, with rare exceptions, their effect in the long 
run tends to balance. 

Supposing that there had never been an actual scarcity 
of money, and that money would therefore never have had the 
power to command interest ; supposing also that land owner- 
ship had always been conditional on the payment of a tax, at 
a fixed rate (332a), on the value of the land: it would follow 
from what we have learned above that the taxes paid on land 
would always have been about as much as the rent derived 
from the land plus the increment of its value. The communit^^ 
would then not only have been paid for what it furnished in 
the form of rent (323), but would also have gotten the value 
of the attendant increments. The owners of the land would 
therefore be justly entitled to all the increments which make 
up its full value, having paid that much to the community 
for the right of owning the land (288). This value would 
virtually represent a debt due to the landowners by the com- 
munity, payable whenever the community requires to get 
possession of the land (326, 334). 

But the actual economic conditions differ from those of this 
hypothetical case. Monetary systems everywhere are defective 
and have always been so (261), and the item of pure interest 
has therefore always been a potent factor in determining the 
apportionment of incomes. With competition hampered 
through restriction of the freedom of exchange, land owner- 
ship has not been conditional on the payment by the land- 
owner to the community of a tax equal to the economic rent 
plus the increment of land value. As the case stands, the com- 
munity has all along not only, as it were, released the land- 
owner from the payment of a full equivalent for the protection 



448 CONCLUSIONS [329 

and benefit rendered him by the community, but also left to 
him the greater part of the increment of the land value, thus 
incidentally saddling itself with what is tantamount to an obli- 
gation to the landowner, to the extent of the value of the land. 
Hence it will be readily understood that any increase of the 
value of land, in excess of the tax paid on account of that 
increase, is a direct and unearned gain to the landowner which 
virtually takes the form of a debt owing to him by the com- 
munity, and which is thus correspondingly a loss to the com- 
munity (216). 

That the value of land is in the nature of a debt owed by 
the community to the landowner is plain enough from the fact 
that the public is now constantly providing what amounts to 
an interest charge, accruing to the landowner as "rent." 

The adoption of a measure of currency reform that would 
remove the restrictions on the freedom of exchange would not 
be followed by an increase in the market value of land, if coin- 
cidently with that reform the tax rate on land would be in- 
creased in the same measure as the current rate of pure 
interest falls, thus leaving the sum t -\-i unchanged. But 
such a constant adaptation of the tax rate to the falling interest 
rate being obviously impracticable, a rise of land values result- 
ing from the fall of the interest rate is inevitable. Such an 
increase would of course be an unearned gain to the landowner 
at the expense of the community (3326). But whatever loss 
this might entail on the community, it would be of trifling 
moment as compared with the cost of trying to attain social 
justice on the plan of either socialism or the single-tax, only to 
find that the one is impracticable (365-367) and the other 
inadequate to effect a just distribution of wealth (364). 

Our successive deductions have enforced the conclusion 
that a removal of the existing restrictions on the medium of 
exchange would bring the market value of land to a higher 
figure than at present, notwithstanding that the owner of land 
could no longer derive from its ownership anything more than 
what would be the wages of his own labor applied to it, since 
he would be paying a tax amounting to the sum of rent and 
increment, B -\- U, which the land affords. 



330] EFFECTS OF CURRENCY REFORM 449 

This is directly opposed to the conclusion reached by Henry 
George and accepted by his followers, that land would no 
longer have any market value if the tax were sufficiently high 
to absorb the entire economic rent. In the absence of land 
value, an increment of such value would, of course, be 
precluded. 

Land values would certainly vanish if no net return could 
be gotten from land, while capital goods and money continued 
to afford such revenue. If, however, pure interest could no 
longer be obtained from money or capital goods, the conclusion 
that land values will disappear does not necessarily follow. 
Were the community to continue to impose a tax on land at a 
given percentage of its value, such value would necessarily 
continue, and its amount would be determined by competition 
for the possession of the land as outlined above (327-328). 
The value would go up to the point where the land would cease 
to bring to its owner a net return, for so long as it yields such 
return, while other forms of capital do not, competition for its 
possession would drive up its value until the value reaches that 
point. 

The value of land which afforded no unearned gain to the 
owner would be quite analogous to the value of treasury notes 
which afford no interest to their holder, both alike representing 
a debt owing by the community. 

330. Assessment of Land Values. — If a tax is to be im- 
posed on the value of land, that value would have to be deter- 
mined for purposes of taxation in some manner prescribed by 
law. The rise of land values which, as we have seen, would 
follow the institution of a proper currency reform, would 
require a re-assessment, from time to time, and with any delay 
of this re-assessment the amount of the tax would remain below 
the amount of the economic rent and increment, leaving an 
unearned income to the owner of the land. 

So long as this appraisement of land is delegated to men 

elected or appointed to office, their determination is likely in 

numerous instances to be more or less inaccurate. There are, 

however, ways in which it may be possible to ascertain the 

29 



450 CONCLUSIONS [831 

market value of land with, reasonable accuracy, and this with 
less expense than by official appraisement. 

Suppose provision were made to let every owner of real 
estate be his own assessor and to levy the tax on his appraise- 
ment. Undervaluation could be guarded against by providing 
that if either the government or any individual should offer to 
purchase the property at a price exceeding this assessment by 
more than, say, ten per cent., the owner must either raise his 
assessment to within the ten per cent, of the offered price, or 
sell at that price. Under such rule each property owner would 
find it to his interest to record a fair value, for if he were 
to assess the property at too low a figure, some one would 
sooner or later bid high enough to compel increase of assess- 
ment or sale. To meet cases where sentimental or other psycho- 
logical considerations come into play, as in the case of home- 
stead holdings, or in the case of a business having a "good- 
will" value, or to guard against spite work, adequate regu- 
lations would of course have to be provided. 

331. Exemption of Fixed Improvements from Taxation. 
— ^Under such a method of assessment as above outlined, the 
tax would evidently be levied not merely on the value of the 
land, but on that of all fixed improvements as well, for a sale 
would inevitably include these improvements. Any plan of 
taxing land by which not more than its economic rent and its 
normal increment of value is to go to the community must logi- 
cally exclude improvements from taxation. This is quite in 
conformity with the single-tax idea generally. It would accord- 
ingly be necessary to deduct the estimated value of the im- 
provements from the total, in order to exempt from taxation 
those improvements, whether they be in the form of builduigs 
erected on the land, or of woodland or fruit trees planted upon 
it, or of clearing, of draining, of irrigation. Where the 
improvements are naturally subject to deterioration, the value 
of the estate and that of the improvements shrink together, 
leaving the value of the land unaffected, unless the factors 
which determine land values have changed at the same time. 
In the ease of such improvements as become incorporated in the 
land (171), as in levelling it for cultivation and clearing it of 



332] EFFECTS OF CURRENCY REFORM 451 

rocks, the improvement should be given consideration in the 
assessment, at least for a number of years, on the same prin- 
ciple as that on which invention is protected by letters patent. 

The importance of exempting fixed improvements on land 
from taxation is generally overestimated. It is often said that 
a tax on that part of real estate which is produced by labor is a 
tax on industry ; but this view can hardly be sustained. Only 
where the improvements consist of dwellings, gardens, private 
parks, etc., and are used and occupied by the owner, will the 
tax have to be borne by the owner ; and apportionment of the 
cost of public protection in proportion to the requirement for 
that protection is not inconsistent with fair play. Where, on 
the other hand, land is used for industrial or commercial 
purposes, a tax assessed on the value of buildings and other 
appurtenances of the business, unlike that assessed on the 
value of land, bears on marginal producers as well as on all 
others, and for this reason must be borne in the end by the 
consumers of the products of the industry. It is therefore by 
no means a tax on industry, but rather a tax on the com- 
munity, inasmuch as the consumers of the products of industry 
are distributed throughout the community. 

However, since the tax on land values alone would prob- 
ably yield a public income fully adequate to meet all legitimate 
requirements of government, it may be found expedient to take 
the measures above suggested for reducing the tax on real 
estate to one on land values alone. 

332. The Tax Rate. — In reaching the conclusion that the 
tax on land values would absorb economic rent and normal 
increment if the current rate of pure interest falls to nil, no 
specific rate of taxation was required to be assumed. No 
matter what the rate of taxation might be, rent plus increment 
would go to the community. If the tax rate were low, land 
values would rule at a higher figure ; with a higher tax rate 
they would be correspondingly lower. In short, the value of 
land independent of improvements would tend to become equal 
to rent plus increment capitalized at the rate of taxation, and 
assuming that value to be correctly appraised, the total land 



452 CONCLUSIONS [332 

tax would ultimately equal the economic rent plus the expected 
increment. 

This line of reasoning does not apply to a tax on improve- 
ments, since their value is determined by the marginal cost of 
their production (153), which, apart from incidents of chance, 
is not affected by the rate of land taxation. Moreover, the 
proposition that land values would equal the sum of the excess 
of taxes paid on land over rent, if pure interest had never come 
into play, is true only on the supposition that the tax rate had 
never been changed (329a), for otherwise the value of land 
would not agree with the excess of taxes paid. 

If the tax rate were changed any time, injustice would be 
done either to the landowners or to the community. Suppose 
that from the first institution of private land ownership the 
rate of taxation had been fixed and that the currency system 
had always afforded full freedom of exchange, so that now 
land values, generally speaking, really equalled the excess of 
taxes over the rent derived from the land, then a raising of the 
tax rate, in depressing land values, would be an injustice to 
landowners equivalent to a partial repudiation of a public 
debt due to them; and, vice versa, a lowering of the tax rate 
would increase land values and would thus without cause in- 
crease the quasi public debt due to landowners, and this would 
be unjust to the community. An invariable and permanently 
fixed tax rate on land would therefore be one of the essential 
conditions of just land laws, and such rate should ultimately 
be established once for all. 

In the adoption of this tax rate the interests of both land- 
owner and community would have to be duly considered. As 
it is impossible, by any plan whatever, sharply to separate the 
value of land from that of its improvements, it may often hap- 
pen that the value subjected to taxation actually includes part 
of the improvements, and in order to minimize such injustice 
as might thus arise, the tax rate should be low. But, on the 
other hand, a low tax rate, entailing a corresponding rise in 
land values, would materially increase the unearned advan- 
tages which, through a falling interest rate, landowners would 
obtain at the expense of the community (329&). 



SS3] EFFECTS OF CURRENCY REFORM 453 

Suppose a rate of 2 per cent, to be adopted, land values 
would rise to fifty times the annual rent plus increment. But 
as this quasi debt of the community to the landowners would 
be free of interest charge, it would not be felt by the com- 
munity, but would have to be met by future purchasers of land. 

333. Land Tax Ample for Public Needs. — When the 
public revenue from land taxation takes in the sum-total of 
all rent plus increment, as it would through an effective cur- 
rency reform — and no change in the tax rate could more than 
temporarily affect this revenue — the public receipts from this 
source would greatly exceed the sum of all taxes now collected 
by towns, counties, states and nation. All other taxes could 
therefore be dispensed with and the entire system of taxation 
simplified. The towns or counties might collect the land tax 
and transfer a certain portion to the states, and these, in turn, 
a due proportion to the national treasury. The total income 
may reasonably be expected to be so great as to make bonded 
public debts wholly unnecessary, and those existing could be 
paid off as rapidly as they mature (288, 341). 

It would probably come to pass under such a system of 
taxation that the revenue would exceed the necessary expenses 
of government, and the question of how equitably to dispose of 
the balance would thus arise. A similar problem has been met 
in some German towns which own land, the income of which 
exceeds municipal requirements, by returning the excess to 
the citizens in the form of dividends. Whether such a system 
would be practicable generally can only be determined by 
experience. It would certainly have a salutary effect on 
voters, every one of whom would have a tangible interest in the 
honest and economic application of the public funds. But be 
this as it may, there are many other ways in which any excess 
of public revenue over the immediate costs of administration 
might properly be expended. Schools, hospitals, libraries and 
other similar institutions which now depend on endowment 
incomes that would practically cease with the elimination of 
pure interest, could easily be supported from this tax, and a 
system of pensions for old age and other disability could be 



454 CONCLUSIONS [334 

instituted. In short, numerous social problems could be ration- 
ally and effectively solved. 

334. Exclusive Rights or Franchises. — The greater num- 
ber, if not all, of the public service franchises granted by 
municipal, county and state governments, involving exclusive 
rights to construct and operate railways, to lay gas, water or 
electric conduits, to run overhead wires, and so forth, assume 
more or less the character of exclusive rights to the use of 
land and may therefore properly be treated as a modified form 
of land ownership (231). All that has been said regarding 
land values fully applies to the value of such franchises. As 
in the case of land, distinction is to be made between the value 
of the mere franchise and the value of the improvements 
which are essential to its utilization. The former may be 
traced to a "rent," namely, to net profits derived from the 
utilization of the franchise; and in addition to this there is 
also generally an "unearned increment." 

Whenever the value of a franchise exceeds the value of the 
capital invested in its utilization, in other words, whenever a 
franchise as such has a market value, it is generally supposed 
that this value is a creation of law. This view is, of course, 
erroneous, for law cannot create value. Men can get richer 
through the mere operation of law only at the expense of other 
men or of the community. What was said in regard to the 
nature of land values (329) is equally true as regards the 
value of franchises. 

It has been the practice to grant franchises for periods 
of 99, or even 999 years, notwithstanding that our descendants 
may refuse to be bound by our extravagance in this respect, A 
number of these franchises have attained a value many times 
exceeding the total capital invested in the necessary improve- 
ments. Some even now return an annual income exceeding 
the total capital reaUy invested, and are likely to return a 
constantly increasing revenue. 

A franchise once granted cannot be annulled by the courts 
on the ground that it was injudiciously granted, without resort- 
ing to revolutionary methods. For this reason the power 



334] EFFECTS OF CURRENCY REFORM 455 

created by these grants is viewed with serious misgiving by 
many observers who realize the gravity of the blunders com- 
mitted in giving away these exclusive rights. Yet these rights 
are not any more detrimental to the community than the 
present system of land ownership, and far less so than the 
present currency system, under which there is created what is 
practically a monopoly of the medium of exchange. 

The injustice to the public interests arising from improvi- 
dent grants of franchises can be corrected by a system of 
taxation, on the same plan on which the land question may be 
solved. All unearned acquisition through public-service rights 
may thus in the end be effectually stopped. A tax analogous 
to the land tax could reasonably be assessed on the value of 
franchises, the owner or owners to report the value, or, if the 
franchise is held by a stock company, to report the value of the 
stock, with the proviso that any bona fide offer for the fran- 
chise exceeding the assessed value more than, say, ten per cent, 
will be the basis of a new assessment within the ten per cent, 
of the offered price. If a two per cent, tax were adopted, our 
penalty for corrupt or shortsighted grants of franchises would 
then be reduced to a quasi public debt equalling the profits due 
exclusively to the franchise itself for a period of fifty years. 

An equitable solution of the currency question would thus 
at once limit the harm resulting from past mismanagement 
of public trusts and at the same time put an end to the acquisi- 
tion of unearned values by owners of land and holders of 
franchises. 



CHAPTER XVIII 

OLD PROBLEMS IN A NEW LIGHT 

335. Diagnosis of the Economic Disorder. — The task of 
a physician in treating a patient is of a threefold nature. He 
has first to examine the patient's condition to learn the symp- 
toms by which the disorder manifests itself. On the basis of 
this information he then determines the source of the trouble, 
and finally he prescribes the remedy in accordance with his 
diagnosis. If his treatment is to work a cure, he must make 
sure that his diagnosis is correct, for unskilled experimenting 
might be the undoing of the patient. 

Just as symptoms of congestion of one organ, or emaciation 
of another, point to a diseased condition of the patient's 
system, so the accumulation of enormous wealth in the hands 
of a few, while vast numbers of the real wealth producers 
obtain but a bare subsistence, and in times of industrial stag- 
nation face even the lack of that, points to a similar morbid 
condition of the economic system. Whatever course of treat- 
ment is to be undertaken to cure the ills of the body social 
must, as in the case of the body physical, be based on a rational 
examination, lest the ''cure be worse than the disease." 

The strictly deductive line of investigation pursued in the 
foregoing pages has consistently led us to the conclusion that 
the underlying cause of the economic disorder is the legalized 
restriction of the right to use credit as a medium of exchange, 
a conclusion which, though confirmed by all the symptoms of 
the social disease, is not in agreement with the accepted tenets 
of the modern school of economics. According to these tenets 
money and capital are justly entitled to pure interest, although 
all of the several theories on which this claim is based are 
controvertible. According to one theory, wealth employed in 
the processes of production earns a share of the proceeds by 
the assistance it renders to labor. According to another, the 
reluctance of men to save what they have produced, in order 
456 



335] OLD PROBLEMS IN A NEW LIGHT 457 

to use it for purposes of further production, can be overcome 
only through the payment of a recompense. According to a 
third, future goods are underrated as compared with the 
present, and the waiting attending the growth of future into 
present goods is rewarded by a corresponding "agio" or in- 
crease. Labor's recompense is supposed to be subject to an 
economic law which causes it to tend to the minimum neces- 
sary for subsistence. Books upon books are written, and 
theories of wages and theories of interest are invented in the 
attempt to prove that things cannot be otherwise than they 
are. Sociologists in the halls of learning are teaching, and 
legislators in congresses and parliaments are formulating into 
law, the misconceptions of economic principles and the misin- 
terpretations of economic history which have come down to 
us from the past. The economic disorder which becomes 
manifest as business stagnation is variously diagnosed as due 
to overproduction, to speculation, to bad investments, to 
hoarding of money, to tinkering with tariff laws, to an undue 
expansion of credit, to loss of confidence, to extravagance, and 
to any and every other imaginable cause. Industrial depres- 
sion, with its attendant evil of widespread enforced idleness, 
is regarded by not a few serious thinkers as an unavoidable 
incident of industrial progress. By others, again, the avarice 
of employers is regarded as the ultimate cause of low wages, 
and under this misconception worlanen are urged to organize 
in order to overcome this supposed avarice by ''collective bar- 
gaining" and to enforce their demands by means of strikes 
and boycotts. Still others hold that the existing system of 
land tenure is the principal cause of economic injustice and 
see in the reform of that system, through taxing land to the 
extent of the entire rent, a cure for the poverty of the masses. 
There are also many who look upon competition as the one 
great bane of the social system, to remove which it is proposed 
to "socialize" all processes of industry and commerce under a 
system of communal ownership of all means of production. 

"Whether the present currency system, which we have found 
to be the seat of the social cancer, is based on rational or irra- 
tional theories, whether the laws which put them in practice 



458 CONCLUSIONS [336 

are just or unjust, the fact remains that these theories are 
generally regarded as true and the laws as proper and right. 
Just as the slave accepted his condition as a matter of course, 
just as the serf of the feudal ages bowed submissively to the 
laws which constrained his liberty, just as the people of the 
Orient, and in a measure those of contemporary Europe, re- 
gard the differences of caste as being in the natural order of 
things, so is governmental restriction of the medium of ex- 
change looked upon as a measure necessary to protect its value. 
Our investigation, however, has made it plain that through 
the operation of this restriction, enforced by law, industry 
and commerce are subjected to an exaction as arbitrary and 
unjust as that imposed in the middle ages by robber barons on 
merchants passing their strongholds. The modem way of 
collecting this impost is more subtle, more refined than that 
of former times, but the result, the acquisition of unearned 
revenues by some at the expense of others, is as indefensible in 
the one case as in the other. 

336. Capital Not Productive. — Physicists have long recog- 
nized the impossibility of devising a "perpetual motion." 
Chemists no longer seek for a "philosopher's stone." But in 
the field of economics capital is yet supposed to have the 
power to propagate itself through the operation of natural 
causes, notwithstanding that a self-creating power of capital 
is inconceivable. The fact is that the apparent power of 
capital to grow is really a power to acquire an unearned share 
of the results of labor performed by those who work. 

The human race cannot continue to consume more than is 
produced. It follows that no one individual can consume 
more than he produces, unless some one else produces more 
than he consumes. Yet it is taken as a matter of course that 
wealth, once acquired, returns a continuous income. 

Suppose a man to work until he is 50 years old and to 
produce wealth, all told, amounting to $40,000. Suppose that 
during this time he consumes the equivalent of $20,000 and, 
on retiring, invests his savings of $20,000 at the rate of 5 per 
cent. Suppose, furthermore, that the yearly income from this 



OLD PROBLEMS IN A NEW LIGHT 459 

investment, amounting to $1000, supplies his subsequent needs, 
and that he dies when 75 years old, leaving the principal of 
$20,000 to his heirs. Summing up, this man will have pro- 
duced wealth to the amount of $40,000, and after using up 
$20,000 before he retires and $25,000 after that, a total of 
$45,000, there is still left $20,000 to be shared among his heirs. 

Existing economic conditions have enabled hitn to acquire 
$25,000 more than he produced. How did this come about? 
That capital has no creative power and therefore cannot add 
value to itself has been amply demonstrated in our previous 
analysis (191-194, 257-267). The inevitable conclusion is 
that the $25,000 received by him in excess of what he has 
produced represents wealth produced by others who, by the 
existing economic conditions, were deprived of it. 

In this way many receive unearned incomes through the 
power of money. The fact that most of these are at the same 
time employed in productive pursuits and thus obtain earned 
wages as well as unearned gains only serves to obscure the 
fact that their capital profits are unearned. 

It must, however, not be left out of sight that the owners 
of capital cannot be held individually responsible for these 
conditions, except in so far as they, as members of the 
community, are responsible for the perpetuation of the exist- 
ing inequitable monetary system (267). It is the system 
which is at fault, and no altruistic capitalist, nor any number 
of them, can do more than sporadically alleviate the evil 
effect of the system. While the practice of the ' ' Golden Rule ' ' 
may result in ameliorating conditions here and there, it cannot 
stay the recurrence of financial crises and the consequent 
industrial and commercial disturbances. 

In our various references to the '^ efficiency" or "pro- 
ductivity" of capital there would appear to be implied the 
assumption that capital in and for itself is productive. The 
fact that capital brings an income to its owner appears to 
afford an all-sufficient basis for that assumption. But our 
investigation has led us to the conclusion that the power of 
capital under existing conditions to command a profit for it- 
self is not traceable to any quality or faculty inherent in it, 



460 CONCLUSIONS [337.338 

but to extraneous conditions, namely, to restrictions placed on 
the freedom of exchange. It is through these restrictions that 
money is given the power to impose a toll on exchange and 
that capital acquires the power to impose a toll on production. 
If capital were really productive, we would let capital do all 
our producing and so escape the necessity of doing any kind 
of work. 

337. The " Almighty " Dollar. — Since money and wealth 
have the power to bring to their owner a perpetual income, it 
is not surprising that the desire for wealth is uppermost in the 
minds of all, with the exception, perhaps, of here and there 
some altruistic idealist. The idea that the power to earn 
interest is a natural attribute of money and of capital is so 
thoroughly rooted in the minds of men that it is generally 
accepted as a matter of course. Everyone is striving to obtain 
a ''competency," and only few stop to analyze this power of 
money and to trace it to its ultimate cause. The influence of 
this peculiar power permeates our entire social system, and the 
worship of money manifests itself in all details of every-day 
life. When a merchant sells his goods, he exchanges with his 
customer equivalent for equivalent; yet when he is handed 
that equivalent in money, he is by custom impelled to acknowl- 
edge its receipt with a humble "thank you," although, in 
point of fact, the purchaser has more reason to be thankful, 
inasmuch as the merchant supplies some particular product 
which his customer wants and in return accepts a mere 
certificate of credit. 

338. The Concentration of Wealth. — The singular power 
of money, without which neither economic rent, nor capital 
returns, nor pure interest could be acquired by the owners 
of land, of capital goods or of money, is directly responsible 
for the tendency of wealth to become concentrated in the 
possession of a comparatively small class of the community. 
Bacon already observed this tendency, for he characterizes 
usury as that which "bringeth the treasure of the reahn into 
few hands, ' ' 

We have already described (244-255) how it comes about 
that the indebtedness of the industrial to the financial world 



338] OLD PROBLEMS IN A NEW LIGHT 461 

is constantly increasing and how numerous business under- 
takings are gradually forced toward bankruptcy. This proc- 
ess is a slow one, to be sure, and only comparatively few con- 
cerns become seriously involved, but the fact remains that the 
process is continually going on, carrying one business after 
another to the brink of bankruptcy, and not a few of them 
over it. 

Some of these concerns, especially if extensive and normally 
prosperous, are saved from extinction through "reorganiza- 
tion," and in that case ''financiers" generally gain control. 

Owing to the restraint enforced through the existing cur- 
rency and banking laws, banks are unable to supply all the 
facilities of exchange normally required for the conduct of 
business, and it is quite natural that those concerns which 
come into the control of banking interests are favored. The 
brunt of the system therefore falls most heavily on those who 
are not identified with financial agencies, and who, having to 
work without adequate facilities of exchange, are handicapped 
in competition and are finally driven from the field. The 
inability of such concerns to hold their ground is generally 
attributed to the operations of the financed concerns which 
go under the name of "trusts" and which are supposed to 
gain or to seek a monopoly power by "pushing their com- 
petitors to the wall." This, however, is simply a phase of 
the process by which wealth is concentrated and through which 
the most important industries gradually pass into the control 
of a comparatively few "captains of finance" (275, 364). 

The so-called "trusts" are accordingly the natural and 
inevitable outcome of the money monopoly. They are usually 
regarded as being themselves monopolies, or attempts at 
monopoly, but they cannot properly be classed as such, except 
as they are in possession of special privileges. Apart from 
such privileges they are not legally protected against com- 
petition in their respective fields, but rather the contrary, 
and if they develop monopolistic power, they obtain it in- 
directly through their ownership or control of money or of 
land, especially mineral lands, or both. The oppressive power 
of ** trusts" has its ultimate source and stronghold in the 



462 CONCLUSIONS [339. 340 

money monopoly, and only with the ending of that monopoly 
will those trade combinations which now wield a power akin 
to monopoly lose this power. 

339. Efforts to Curb the Concentration of Wealth. — The 
steady growth of enormous fortunes in the hands of a com- 
paratively few individuals, which has become so marked a 
feature of our industrial system, has come to be regarded with 
apprehension lest the continuance of this growth lead to in- 
tolerable conditions. Out of this apprehension has arisen a 
disposition to counteract this growth through legal measures. 
Although the idea of definitely limiting the wealth of in- 
dividuals, while not without advocates, is nowhere seriously 
entertained, methods having the same tendency, such as gradu- 
ated inheritance and income taxes, have been enacted into law. 

Such measures are, however, inadequate to establish justice 
or to prevent the accumulation of unearned fortunes. Gradu- 
ated taxation is imposed equally upon wealth acquired through 
labor and upon that acquired through the operation of unjust 
laws. On the one hand such taxation penalizes industry and 
thrift, while, on the other, it recovers only a small share of the 
unearned incomes. Moreover, this share goes to the com- 
munity without affording redress to those who have been 
deprived of the full fruit of their labor. 

340. Corporation and Bankruptcy Laws. — Statistics show 
that a very large percentage of all business undertakings meet 
with failure within the first one or two decades of their ex- 
istence. Of these failures some are doubtless due to misjudg- 
ment or incompetency. Others are due to losses sustained 
through unforeseen causes, and a number are fraudulent. But 
over and above all these there is a long and continuous list of 
business failures which are due to the general financial stress 
(255). Numerous concerns which are staggering under the 
burden imposed on industry by the faults of our financial 
system are precipitated into bankruptcy through no fault of 
theirs, but through the disastrous working of that system. 

It has been in recognition of the blamelessness of such 
bankrupts that laws imposing imprisonment for debt have 
been abolished, and in their place proyision has been made 



341] OLD PROBLEMS IN A NEW LIGHT 463 

for the release of bankrupts from all debt remaining after 
bankruptcy proceedings have been consummated. And if an 
incorporated company becomes bankrupt, the claims of its 
creditors are limited to the actual assets of the corporation. 
By virtue of this limitation the claims of creditors cannot be 
extended to the individual members of the corporation, and 
the creditors lose more or less of their claims, notwithstanding 
that the individual members of the company may be possessed 
of ample wealth. 

Such protection is apt to be abused. It presents a tempta- 
tion to the undertaking of speculative ventures whose pro- 
moters have everything to gain from success, while in the 
event of failure the loss falls, at least in part, on others. 
Although the intent of the law is good, it has the effect of 
affording undue protection to unscrupulous men. 

A reform of the money system that would permit sound 
business credit to be monetized without the inequitable tribute 
of pure interest (246-255) would result in a condition where 
no business man entitled to credit need lack money. A delay 
in the payment of accounts would be clear evidence that the 
debtor is not entitled to further trust. Inasmuch as the same 
reform would remove the present incubus on business, the 
temptation to take risks in selling goods on credit would be 
lessened, and unpaid accounts would not pile up as now (312, 
314). Thus the one great cause of bankruptcies would be 
removed, and the legalized limitation of liabilities would no 
longer be found necessary for the protection of legitimate 
business. 

341. Public Debts. — ^When interest-bearing public debts 
are contracted, it is generally held that the borrowed money 
should be used only for permanent improvements, and that 
all current public requirements should be covered by taxation. 
Inasmuch as permanent improvements will inure to the benefit 
of succeeding generations, it seems proper that they should 
bear a share of the cost of the work, and it is generally sup- 
posed that through going into debt for the improvements 
and leaving it for posterity to pay the debt, we make them 



464 CONCLUSIONS [34 1 

bear a share of that cost. But when critically examined, this 
supposition is found to be a mistake. 

One thing is certain. We cannot in any way make pos- 
terity help us to do the work of making those improvements. 
Such public property as national defences, roads, bridges, 
waterworks, public buildings, sewers, etc., must be completed 
before we ourselves can reap any benefit from them, and the 
future generations cannot help us to complete them. 

If, then, they cannot lend us any help in this direction, 
in what other way can we make them assist us ? Can we really 
do so by going into debt ? 

Posterity inherits from preceding generations all wealth 
which these have produced over and above that which was 
consumed or destroyed ; no more, no less. Debts transmitted 
cannot affect the total inheritance of succeeding generations 
for the simple reason that the inheritance includes the credits 
as well as the debts, and the sum of all credits necessarily 
equals the sum of all debts. And if the future generation 
gets from its predecessor neither more nor less, whether or 
not it inherits a public debt, it would seem that the present 
generation can in no way be benefited by incurring such a 
debt. 

When public improvements are undertaken, as when a 
system of sewers is being built, the workers must be com- 
pensated for their services, and this is ordinarily done with 
money. This money can be obtained by the community in 
three different ways: (1) through taxation; (2) through the 
creation of a funded debt — by an issue of bonds; and (3) 
through the creation of an unfunded debt — ^by the issue of 
currency notes. 

If, in the first place, the money is raised by taxation, and 
the taxpayers are determined to let a future generation "do 
the paying," they must create debts to be paid by the future 
generation, and this they can only do by individually borrow- 
ing the money required and securing the debts by their 
property. The improvements paid for by the taxes so raised 
become the property of the community, while the correspond- 
ing debit stands against the property of the taxpayers. 



341] OLD PROBLEMS IN A NEW LIGHT 465 

If, in the second place, the money is raised through an 
issue of bonds, the improvements become the property of the 
community, while the public bonded debt constitutes a cor- 
responding debit against the property of the taxpayers. 

If, in the third place, the money is obtained through an 
issue of currency notes instead of bonds, the improvements 
become the property of the community, while the notes emitted 
by the government constitute a corresponding debit against 
the property of the taxpayers. 

This shows that in either case the taxpayers contract a 
debt equal to the cost of the improvements. In this respect 
the result is the same in the three eases. But in respect to 
the interest involved there, is a marked difference. 

In the iirst ease it is the taxpayers individually who must 
pay the interest on their respective shares of the debt. 

In the second case it is the community as a whole which 
pays the interest on the debt, but inasmuch as interest on 
public debts is one of the current public requirements, the 
money to pay it must be obtained through taxation. It fol- 
lows that, as in the first case, the interest is paid by the tax- 
payers. 

In the third case, however, the payment of interest falls 
away altogether. 

The notion that we can make our descendants pay for 
public improvements and thereby make it easier for ourselves 
is due to the lack of a proper understanding of the nature of 
money. "We have found that there is a distinction between an 
economic cancellation and a legal payment of a debt (75, 95). 
An economic cancellation embraces the delivery of actual 
wealth, while a legal payment of a debt is not a cancellation 
at all, but consists in giving one credit instrument for another 
one. Even the payment of a debt with gold coin is not a 
cancellation of the debt, unless the recipient intends using 
the metal of the gold coin as such. If he does not do so, if he 
subsequently expends the coin as money, he uses it in its 
capacity as a credit instrument of which the gold is merely 
a collateral security, as an instrument conveying a claim to 
merchandise, and not as merchandise itself. 
30 



466 CONCLUSIONS [341 

Inasmuch as public debts are payable in money, they are 
payable in credit instruments. Money represents an acknowl- 
edgment of debt which is accepted as money by virtue of a 
communal agreement. And there is no reason, outside of our 
unreasonable banking laws, why monetized public credit, 
adequately assured and redeemable in gold, should not be 
used in place of the monetized credit of some banker in mak- 
ing payments for public improvements as the sundry pay- 
ments become due during the progress of the work. If cur- 
rency notes issued on public credit were used for such pay- 
ments instead of the money borrowed on interest-bearing 
bonds, the debt would readily be carried by the public in the 
form of a medium of exchange without interest. 

When, as is now the practice, public improvements are 
financed through the creation of an interest-bearing debt, the 
interest is not paid for any actual service of the financiers, but 
merely because the community has placed artificial obstruc- 
tions in the way of the process of exchange (264). The pay- 
ment of interest does not arise from economic exigencies, but 
only from artificial conditions created by law. 

"Whenever the proposition is advanced to save the payment 
of the interest charge on public debts by monetizing the 
public credit through the issue of currency notes, the cry of 
''inflation" and "fiat money" is raised (320), and the attend- 
ing increase of exchange facilities is branded as a danger to 
industry and commerce. The issue of non-interest-bearing 
currency is condemned on the basis of a supposed danger of 
an over-supply of money, and on the plea that government 
should not go into the banking business, as that would mean 
socialism, but should leave that to private enterprise. The 
issue of interest-bearing bonds is accordingly urged as the 
only safe alternative. Furthermore, it is often insisted that 
whenever a government issues bonds, they should be sold for 
"real money, " namely, gold, and not for "money substitutes," 
It is, however, a fact that bonds have all along been sold for 
money other than gold, and there is no cogent reason for in- 
sisting on gold at any time. Stamped pieces of gold used as 
money offer no advantage whatever over sound credit cur- 



842] OLD PROBLEMS IN A NEW LIGHT 467 

rency. "When governments issue bonds, they do so because 
they are in need of mo7iey for purposes of payment, and since 
any valid credit monetized through the issue of currency notes, 
if fully secured and regularly redeemable in gold, serves in 
the channels of exchange the same purpose as gold coin, there 
is no reason for the discrimination. Money-lenders demand 
the same amount of interest, whether they loan ' ' real money, ' ' 
"money substitutes," or only "bank credit." In their deal- 
ings with borrowers they make no distinction between the 
various forms of the medium of exchange. Why, then, should 
it be assumed that the government must have gold for the 
purpose of paying its obligations? Gold is needed only for 
the purpose of redemption, and currency issued on the same 
credit as that on which bonds are now issued must of course 
be as good as the bonds. If currency were issued in place of 
interest-bearing bonds, the small amount of gold requisite to 
make these notes redeemable in bullion could be obtained by 
the government from the same source from which bankers now 
obtain it. There is clearly no excuse for the issue of interest- 
bearing government bonds. As a matter of fact, there is not 
even any real necessity for monetizing the public credit as 
suggested above. If we had a system of currency free from 
needless limitations imposed by law, the public income from 
the land tax (288, 333) would fully suffice for all public 
requirements, including the costs of permanent improvements, 
hence there would be no occasion for incurring public debts 
of any kind whatsoever. 

342. The Strife of Competition. — There is a prevailing 
idea that it is competition which makes it so difficult, and 
frequently impossible, for a small business, however capably 
it may be conducted, to maintain itself in the market along- 
side larger competitors. Competition is sometimes likened to 
warfare in which those engaged in business strive for the 
mastery, the defeated being compelled to give up. But com- 
petition, in and by itself, cannot have a destructive effect. 
Under natural conditions a capable but small competitor 
ought to be able to obtain his due share of the market, and 



468 CONCLUSIONS [343 

where and when this is not the case, we must look to find the 
cause that produces this effect. The following homely example 
will be found fully to confirm a number of our deductions. 

343. Competition in a Moneyless Community. — Let us 
imagine a primitive community in which simple barter answers 
all the purposes of exchange, and in which a medium of ex- 
change is as yet unknown. In such a community the principal 
products would doubtless be things to eat and things to wear, 
and our attention may therefore be concentrated on two 
classes of producers : the makers of bread and the makers of 
clothes. For the sake of argument let us assume that the 
effort required in making a set of apparel is as much as the 
effort of making 500 loaves of bread, and that, accordingly, 
through the operation of competition, 500 loaves will normally 
exchange for one set of apparel. 

Suppose now that the more ambitious tradesmen get the 
notion that through underbidding their fellow tradesmen 
they can do more business, and that smaller profits on bigger 
business bring more wealth. Some of the bakers would accord- 
ingly offer, say, 550 loaves of bread for a suit of clothes, and 
others, apprehending a loss of trade, would fall in line and do 
likewise. But a similar rivalry must be supposed to spring 
up among the tailors also. Imagine one of the tailors to under- 
bid the others by offering a suit of clothes for, say, 450 loaves, 
and the others to follow his example for fear of losing custom. 
We would then have the spectacle of the tailors offering a 
suit of clothes for 450 loaves, while the bakers insist upon 
giving 550. Such competition is, of course, unthinkable, nor 
does it illustrate the process by which, in the real world, even 
capable competitors are eliminated from the field. What is 
there, then, in industrial competition that has this effect? 

It may be held that competition is destructive only to the 
less capable competitors. If that were the case both the bakers 
who cannot make bread as fast or as good as others, and the 
tailors who are slower and less skilled than others, would have 
to get out of business. But what is it that prevents the less 
skilled of both trades from going on producing and exchanging 
their products to the extent of their capacity ? 



343] OLD PROBLEMS IN A NEW LIGHT 469 

It is, of course, plain enough that conditions may arise 
which prompt underbidding. Suppose that in our primitive 
community there are too many bakers in proportion to the 
tailors, so that more bread is made with a view of getting 
clothes than there are clothes being offered in exchange for 
bread. Since the bakers cannot all be supplied with the 
clothes they want for their bread, they will compete among 
themselves for the clothes, and the price of bread will go 
down; in other words, 550 instead of 500 loaves will be paid 
for a suit. This, of course, means a rise in the value of clothes, 
the tailors having in this case no reason to compete against 
each other. But since, as we have assumed, it takes as much 
labor to produce a suit of clothes as to make 500 loaves of 
bread, the tailor trade would be more attractive than that of 
baking, and the most versatile of the bakers would learn 
tailoring and become tailors. Underbidding among the tailors 
would thereupon begin, and a readjustment of the exchange 
rate would proceed until the normal ratio of 500 to 1 is 
re-established. 

It is thus apparent that competition is the prime factor in 
the process by which the relative quantities of the various 
things produced for the market are regulated in proportion 
to the demand, and their exchange rates adjusted to corre- 
spond with the effort required in their production (147). 

In this last phase of our illustration we had assumed that 
over-production of bread is coincident with under-production 
of clothes. But, it may be asked, what will happen if both 
the bakers and the tailors produce more goods than they can 
dispose of ? It is clear, of course, that the bakers would have 
no difficulty in exchanging part of their over-produced bread 
for part of the over-produced clothes, resulting in both bakers 
and tailors being well supplied with food and clothing; in 
other words, all would be rich and could afford to stop work 
for a time. But how can this lead to either of them being 
driven out of the market ? In our moneyless community com- 
petition could never degenerate into a semblance of warfare 
through which competitors are driven from the field and 



470 CONCLUSIONS [344 

deprived of their chance to earn a livelihood. Something else 
than competition must obviously enter into the problem. 

344. The Advent of Money. — This moneyless method of 
trading has its disadvantages. When a tailor sells a suit of 
clothes and accepts 500 loaves of bread in exchange, a portion 
of this bread will become stale, and some will perhaps even 
spoil before it can be consumed. And when the baker needs 
a suit of clothes, he must work day and night to produce 500 
fresh loaves for the occasion, while ordinarily he needs but a 
fraction of that number for his daily requirements. But these 
disadvantages are not insurmountable, as we shall presently 
see. 

One of the townsmen becomes possessor of a quantity of 
silver which, by reason of its utility for ornaments, is highly 
prized in the community, A part of this he cuts into pieces, 
some large, some small. The small ones he makes of such a 
size that each evenly exchanges for a loaf of bread, and calls 
them dimes. The large ones he makes ten times as heavy, so 
that 50 of them will buy a suit of clothes, and he calls them 
dollars. 

When he needs bread or clothes, he offers in exchange such 
silver pieces, which both bakers and tailors readily accept, 
seeing that they can make similar use of them among them- 
selves. When the tailor wants a loaf of bread, he gives a 
dime piece in exchange for it and is thus easily enabled to get 
fresh bread as he wants it, while the baker, in turn, when he 
wants a suit of clothes, finds the tailor ready to accept 50 of 
the dollar pieces in return. The silver pieces have become a 
medium of exchange — money. 

All the tradesmen of the community soon realize the ad- 
vantages of these pieces of silver as a medium of exchange, 
and as such they are sought after by all who have things to 
exchange. Since, however, the owner of the silver has no 
occasion to use more than a small portion of it for his own 
purchases, all of it does not find its way into circulation, and 
a number of the tradesmen seek to borrow some of the silver 
from its owner. Seeing this demand for his silver, he offers 
to lend it in return for a recompense, the amount of which 



344] OLD PROBLEMS IN A NEW LIGHT 471 

is to be determined by competition. In the end he agrees to 
give it over to the borrowers on condition that they return it 
to him at the end of a year, with the addition of one dime 
for each dollar of the borrowed silver. 

Let us suppose that after supplying the demand for silver 
to be used for ornaments, the owner of the silver has enough 
left to make 105,000 dollar pieces. The greater portion of 
this he now makes up into pieces of that size, and the remainder 
into dime pieces. Reserving 5000 dollars for his own use, he 
proceeds to lend out the balance. Some men borrow 100 dol- 
lars, others more, others less. 

During the year the lender spends his 5000 dollars, giving 
some of it in alms to the. poor, and at the end of the year the 
entire amount of coined silver is in circulation. 

The borrowers, finding it difficult to get along without 
money in their business, now seek renewal of their loans. This 
being granted, they pay nothing more than the stipulated 
recompense, amounting to 10,000 dollars. This leaves them 
indebted to the amount of 100,000 dollars, while the amount 
in circulation is 95,000. 

Of his income the lender now again reserves for his own 
use 5000 dollars and offers the other 5000 to the borrowers, 
who, needing as much as before, and having only 95,000, all 
told, are glad to avail themselves of the offer and borrow the 
tendered sum on the same terms as before. They now owe 
to the lender 105,000 dollars. 

When the second year expires and the total amount of 
silver is again in circulation, they compensate the lender for 
the loan of 105,000 dollars, by paying him 10,500. This leaves 
only 94,500 in circulation. As the silver pieces have now be- 
come a necessity, the borrowers ask for a renewal of the old 
loans, and the lender not only agrees to this, but lends out 
5500 of his income in addition, retaining, as before, 5000 
dollars for personal expenses. The loans now amount to 
110,500 dollars. 

This process continues. In the course of each year the 
lender expends 5000 dollars of his income and lends out the 
remainder, and each succeeding year his claim upon the com- 



472 CONCLUSIONS [345 

munity increases more rapidly, so that during the eighteenth 
year the debts owing him exceed 300,000 dollars, although all 
the money in existence is not more than 105,000 (255). 

345. The Real Battle-Ground. — The lender now gives 
notice that at the end of the year he desires to collect one-half 
his loans. In preparing themselves for the occasion, the 
debtors begin to retain the money as it comes into their hands, 
instead of spending it, and even turn a quantity of the silver 
intended for ornaments into coin. Although the total amount 
of money is thus actually increased, it gradually disappears 
from circulation. The war of competition, as we know it, 
now sets in. But it is evidently a competition for money 
(201). In this struggle the only recourse open to the debtors 
is the underselling of their competitors. The bakers offer 11 
loaves for a dollar, while the tailors reduce the price of their 
suits to 45 dollars (273). It will be observed that, while both 
bread and clothes are reduced in price, their relative value 
remains as 1 to 500, or nearly so. The absurd condition which 
resulted when the moneyless community was seized with the 
spirit of underbidding is not present here. We have not here 
the case of the bakers offering more bread for a suit of clothes 
and the tailors offering to take less. What they both want 
now is silver, the only thing with which they can pay their 
debts. 

It will be observed that if the townsmen had originally 
agreed to pay the interest with the produce of their labor, 
namely, with bread and clothes (244), there would have been 
no occasion to increase their debts iu the effort of keeping all 
money in circulation, and the indebtedness would not have 
grown to proportions which made ultimate payment impossible. 
The underselling was prompted, not by a demand for a medium 
of exchange, but by the demand for the stipulated means of 
paying debts. Hence the fall in prices was not due to the 
demand for money for purposes of exchange, but to a struggle 
to escape the consequences of a failure to meet the stipulated 
obligations. 

The sequel of this war is a foregone conclusion. The re- 
luctance to part with money and its withdrawal from circula- 



346] OLD PROBLEMS IN A NEW LIGHT 473 

tion result in a general reduction of business, and consequently 
in a general restriction of production. And when the time of 
settlement is at hand, there being not enough silver in ex- 
istence to meet even one-half the obligations of the debtors, 
many must fail (255) . 

346. Significance of the Illustration. — The main features 
presented by our illustration have their parallels in the actual 
world. Bank note currency, like the silver pieces of our com- 
munity, gets into circulation mainly through loans on which 
interest must be paid, and bank credit is issued in the same 
way. 

As shown in our illustration, these loans gradually and 
persistently grow through the addition of interest, and since 
this has been going on through generations past, the sum- 
total of loan debts now exceeds many times the total volume 
of money. An indefinite increase of the volume of debt is 
prevented only through the interminable succession of busi- 
ness failures which is so constant a feature of the commercial 
world and which at intervals, when the volume of debt has 
become excessive, are precipitated in a mass. In our modem 
era, competition, which normally should have the effect of 
regulating the exchange of services, is transformed into a con- 
tention for the means of exchange, and the natural course of 
trade is distorted into a scramble for money. The eagerness 
to obtain money and the reluctance to part with it have be- 
come second nature to us all, and a large amount of effort 
that should go to production is wasted in hunting for trade. 

When accumulated debts cause an excessive demand for 
means of payment, all possible resources are drawn upon to 
obtain these means. Under this pressure all available money 
metal is turned from the field of industry into the field of 
exchange. The point V of Fig. 11 is moved toward the right, 
and the value of the money metal rises. This explains the 
fall of prices during periods of business crises. 

However critically we analyze the effects of free compe- 
tition, only salutary results can be traced to it. When com- 
petition is characterized as destructive (147), it is because of 
a misunderstanding of its essence. The war of competition 



474 CONCLUSIONS [347 

is a fight for the possession of something the production of 
which is arbitrarily restricted, namely, that which enables 
producers to exchange the fruit of their labor. In short, it is 
a struggle for freedom to do business, for the right to work. 
Not competition that regulates the exchange of services, but 
competition for the only means through which such exchange 
can be effected, is at the foundation of the strife that now 
pervades the economic world (354). 

347. The Iron Law of Wages. — Our earlier deliberations 
(151-162) failed to show the causes which in the modern in- 
dustrial world decide the division of incomes between capital 
and labor. It was made clear that competition takes no part 
in this apportionment. Later (186-208) we found that the 
accepted theories of capital interest are defective and fail to 
point out the forces which govern the division. Ultimately it 
was found (236-267) that capital obtains its power to acquire 
profits for its owner through the working of an irrational 
currency system maintained by irrational laws. 

Briefly reviewed, the law, by restricting the production of 
the needed medium of exchange, obstructs those exchanges 
which are necessary for the aggregation of capital goods as 
they are needed in the process of production (242), with the 
effect of keeping down the amount of capital in productive 
use. In diagram Fig. 18 it has been graphically shown that 
if the capital employed is limited to OC, the corresponding 
productivity of labor employing this capital is represented by 
the area OC'e'E, which is less than the natural maximum 
productivity OCE of this same labor. Of the amount so 
produced the portion OC'e'i accrues to the owner of the capital 
employed (143), leaving to the active agents of the productive 
group an amount represented by the area ie'E. 

If exchanges were not obstructed, labor's productivity 
would rise to its maximum OCE, of which no portion need be 
paid to capital as pure interest. This has been amply demon- 
strated in the preceding chapter. It follows that under 
present conditions labor is deprived of the amount C'Ce' by 
being unable to employ the most efficient mode of production 



348] OLD PROBLEMS IN A NEW LIGHT 475 

(158), and is despoiled of the share OG'e'i, which amount is 
given to capital for nothing else than for the right to work 
(261). These losses to labor can be avoided through rational 
currency reform (302-308). 

When it is considered that under the reign of equitable 
laws the area OGE would represent wages, while under present 
conditions wages are represented by the area ie'E, it is easy to 
see that to-day wages equal the reduced productivity of lahor 
OG'e'E, less the portion OG'e'i, which is diverted from wages 
and improperly allotted to capital (358). 

348. The Employer's Part in the Process of Apportion- 
ment. — The sharing of the gross income of a group is effected 
by the employer. Out of- the gross income he pays the value 
AB, Fig. 13, of all services contributed by other groups ; the 
rent BG for the use of the land employed; the interest GE for 
the use of all capital goods and ready money needed; and 
finally the wages EF of the employes, retaining for himself the 
residual share FG as his wages. 

If part of the working capital has been obtained through 
borrowed money, a corresponding share DE of the interest CE 
accrues as money interest to the lender. 

The share AB is similarly shared out by the several groups 
who receive it ; hence the value of the final consumption goods 
is, in the last analysis, divided into rent, interest, and wages. 
When consumption goods are sold in the market, the pur- 
chasers must pay a price that comprises rent, interest, and 
wages. But for producing these goods the active agents of 
production receive only wages. When they collectively buy 
back their own productions, they must pay more than they re- 
ceived for producing them. It is by this process that the 
workers, as consumers, furnish the unearned incomes of land- 
lords, capitalists, and money-lenders. They clearly recognize 
that collectively they pay for the things they buy more than 
what they collectively have received for producing them. As 
far as they can see, the employer is the agent intervening be- 
tween the producing and the marketing. It is therefore not 
unnatural for the workmen to come to the conclusion that the 



476 CONCLUSIONS [348 

employer gets the excess of what they pay for the things over 
what they receive for producing them. 

But does the employer as such really get the items of rent 
and interest, or any part of them ? 

Rent arises from the fact that the amount of effort neces- 
sary to produce and bring to market equal quantities of a 
given commodity is greater or less according as these are 
produced on more or less fertile land or on land more or less 
favorably located. Competition for the possession and use 
of the different degrees of advantage thus inherent in land 
enforces on the employer occupying it the payment of rent 
(172-174, 371), and through the rent, which amounts to more 
or less according as the land used offers more or less ad- 
vantages, the cost of producing equal quantities is practically 
equalized. But we have also found that the rent would go to 
the community through taxation, if our currency laws were 
reasonably amended (323-328). The unavoidable addition of 
the item "rent" to the other items of cost determining the 
value of the final consumption goods would then constitute an 
indirect tax, relieving the community of aU other taxes. At 
any rate, the employer derives no benefit from the addition of 
the rent item to the value of the consumption goods, whether 
the landowner retains the greater part of the rent, as now, or 
turns the entire rent over to the community in compensation 
for his right of owning the land. 

If the employer is not also capitalist, if he is at the margin 
as regards the use of capital (257), having obtained the 
capital goods employed by him through borrowed money, he 
cannot escape the payment of interest on the loan (240) which, 
as an item of the cost of production, is added to the other items 
of cost which together make up the market value of the goods 
produced. Here also the employer cannot be held responsible 
for that addition to the market value of the goods through 
which the consumers are made to provide the income of pure 
interest to the money-lenders, nor does he derive any benefit 
therefrom. 

If the employer is owner of a portion or all of the capital 
employed, he gains an unearned profit through the fact that 



349] OLD PROBLEMS IN A NEW LIGHT 477 

the market value of the product includes pure interest as an 
item of its composition. But he acquires this unearned gain 
(265) in the capacity of capitalist and not as employer (146) ; 
nor is he responsible for the fact that this profit accrues to 
him, for he gets it without any deliberate action on his part. 
Again, we must not only absolve the employer from all blame 
for this unjust distribution of incomes, but must also reiterate 
that in the capacity of employer he does not receive interest. 

While the employer indeed effects the distribution, he does 
so under the dominance of economic forces. While he divides 
the net income of his group into rent, interest and wages, he is 
powerless to do otherwise. He is a mere tool, a "cat's paw" 
(358), in the process by which the landlord, the capitalist, 
and the money-lender are accorded their unearned shares. 

349. The Downward Tendency of Wages. — ^Wages being 
what is left of the market value of the product of labor paid by 
the consumer, after rent and interest have been taken there- 
from in the process of distribution, it remains for us to learn 
to what extent capital gains at the expense of labor. 

Under given conditions the share acquired by the land- 
lord is definitely determinable. The margin of the use of 
land is determined by the quantity of land required for the 
production of all that is called for by the existing demand; 
and intra-marginal land cannot return to its owner more than 
the value of the advantage which its use affords over that of 
marginal land. 

Interest, however, is determined in a different way. Its 
primary tendency is to adjust itself to the final efficiency of 
capital, and this has a positive value only on account of the 
insufficiency of the medium of exchange. But as a result of 
the ever-increasing indebtedness the sum-total of the interest 
toll gradually increases until it exceeds what the "traffic can 
bear," leading to the well-known periodic exhaustion of the 
business world and consequent stagnation of business, when 
industry comes to a partial standstill, and all workmen cannot 
be employed. The rate of interest is then depressed below the 
rate corresponding to the final efficiency of capital, just as a 
falling rain drop is restrained by the resistance of the air from 



478 CONCLUSIONS [349 

attaining tlie speed that it should have according to Newton's 
law of falling bodies. 

So long as there are workers vainly seeking employment, 
they naturally offer their services for less than their fellows 
are getting, with the consequent tendency of wages to a lower 
level. "When the number of workers seeking to dispose of their 
services is at all considerable, the tendency of wages is toward 
a minimum of subsistence, and at times even to a point below 
it. This is what has been termed the ''Iron Law of Wages." 
The least capable workers are thus forced to take for their 
share scarcely enough to meet their needs and the needs of 
their children who are later to take their places. These workers 
are indeed victims of a grievous condition which is often, 
through ignorance of the true state of affairs, ascribed to the 
greed of employers and stigmatized as "exploitation." The 
ultimate cause of the inadequate returns to the workers, the 
real reason of low wages, is not to be found in the struggle of 
competition, as economists of the socialistic school imagine, 
but in the insufficient demand for labor, which, in turn, is 
due to the operation of our currency laws (268-270). The 
tendency of wages to go below the current cost of subsistence 
must inevitably continue as long as through needless restriction 
of the issue of currency the freedom of exchange is in any way 
obstructed. 

Meanwhile the army of the unemployed will vary in 
numbers with the alternations in the cycle of business activ- 
ity, and the downward tendency of wages will come inter- 
mittently into play. In many countries involuntary idle- 
ness of large numbers of workers has become a chronic dis- 
order of the social organism, but periodically it is manifest 
throughout the world. Some of the workers perish for lack of 
adequate means of subsistence, or through sickness caused by 
anxiety and want, and charity, organized or unorganized, can 
do but little more than ameliorate this condition. Many of 
the unemployed become beggars and ultimately confirmed 
paupers. It is undoubtedly true that the dearth of employ- 
ment is largely responsible for the tramp evil, partly because 
the difficulty of finding employment develops the habit of idle- 
ness, and partly because some individuals have learned how 



350] OLD PROBLEMS IN A NEW LIGHT 479 

to live without work through, appeals to charity on the plausible 
pretext of being unable to find employment. And from habitual 
idleness there is but a short step to crime. Thus the system that 
is responsible for unemployment is also responsible for much of 
the criminality of our time. Criminal traits have indeed 
become so rooted in some classes of society by centuries of 
oppression that criminologists have come to consider the pro- 
pensity to crime an hereditary disease. 

350. Effect of Proposed Currency Reform on Wages. — 
To the workman a money reform having in view the elimina- 
tion of pure interest may seem to benefit only borrowers of 
money, and thus leave out the mass of wage-workers from any 
share of its advantages. . It would appear as though the only 
ones among the wage- workers to benefit by such a reform are 
the few who ultimately work their way into the class of 
employers. 

Nevertheless, the wage-earners would be the chief gainers ; 
the gain would come to them in the form of increased wages. 

Our original inquiry was directed toward finding the 
cause of business depressions, with a view to discover a remedy 
for these economic disturbances. The relation of these causes 
to the level of wages has eoincidently been brought to view. 
When business is depressed, wages are low because the supply 
of labor is in marked excess of the demand. Competition for 
employment is excessive, and with two workers competing for 
one job, wages necessarily go down. Conversely, in periods 
of business activity, when the demand for workers increases, 
wages naturally rise. But our investigation has traced the 
excess of the supply of labor over the demand to undue re- 
strictions in the issue of currency (268-270). Through the 
removal of these restrictions, as here suggested (302-308), 
business activity would be promoted to such an extent that 
even that portion of the product which now goes as pure In- 
terest to capital and to money, would go to wages instead. 
Hence the workers would be getting all that is really due them, 
and the universal dissatisfaction over the present manifestly 
unjust distribution of incomes would no longer have any 
reasonable ground. 

The income of the employer, as manager of the business, 



480 CONCLUSIONS [361 

would likewise be increased with the general increase in wages. 
In many cases the increase of his wages would even more than 
balance the disappearance of capital returns from his income, 
so that both workmen and employers would have every cause 
to welcome the change. Only the unearned profits of capital 
would disappear. 

351. Protective Tariff. — In the effort to maintain a high 
level of wages, most industrial countries have adopted the 
policy of "protection," consisting of a tax on imports designed 
to impede competition from abroad. 

This method of keeping wages up is like an attempt to 
cure a disease by merely symptomatic treatment. Instead of 
freeing commerce from the shackles imposed upon it through 
the restriction of the medium of exchange, whereby a portion 
of labor's wages is diverted from the natural channel, a pro- 
tective tariff adds but another restriction to the freedom of 
exchange. The periodic inability of a large number of workers 
to find employment is looked upon as an unavoidable con- 
comitant of our modern industrial life, being regarded as the 
result of ''overproduction" due to the great increase of labor's 
productivity through advances in the industrial arts. Most 
countries, therefore, strive to hold for their industries the 
largest possible share of the inadequate demand by reducing 
the supply from abroad. To this end tariffs are imposed with 
the object of closing the home market as far as possible to 
foreign products, and all sorts of expedients are resorted to in 
the effort to gain foreign markets for the home products. This 
has led to the system of paying bounties on the exportation of 
certain products, and of subsidies to transportation and other 
agencies. Each nation seeks to increase its exports and to 
diminish its imports, and an excess of exports over imports 
is regarded as a favorable ' ' balance of trade. ' ' 

To export more goods than are imported obviously reduces 
the amount of wealth in a country. It is therefore by no 
means self-evident why such a policy is regarded as beneficial. 
But the popular faith in protection finds explanation in the 
fact that commerce is carried on by exchanging goods for 



351] OLD PROBLEMS IN A NEW LIGHT 481 

money. The policy of protection is not to prevent inter- 
national trade, but to permit, or by bounties even to promote, 
selling abroad, and to restrain buying abroad. It favors ex- 
changes of home products for money and hinders exchanges 
of money for foreign products. It is therefore clear that the 
real effect of tariffs and bounties is to prevent the exportation 
of money and to increase the home stock by drawing upon the 
supply abroad. Tariffs and bounties are, in fact, formidable 
weapons used in the international warfare for the possession 
of money. 

The underlying motive for this contest is the same as that 
which, during the eighteenth century, prompted some 
European states to forbid the exportation of gold and silver. 
It would therefore seem natural that with the decadence of 
the Mercantile school of economists, who urged this prohibition, 
and with the rise of the school which promulgates the volume 
theory of the value of money, the policy of protection would 
have been abandoned. Yet, such has not been the case. It is 
to be noted that if the volume theory were true, the exporta- 
tion of goods for money would be a losing proposition, because 
the amount of goods possessed by a nation is reduced by 
exportation, while the value of all the money in the country 
would, according to the volume theory, remain the same in 
spite of all the additional money received through commerce 
(119). 

But in the light of our investigation and conclusions the 
reason for the widespread popular approval of the policy of 
protection is not far to seek. Experience has indeed proved 
what we have found true in theory, namely that an increase of 
the amount of available money is coincident with an increase 
of industrial activity. A reduction of imports has the effect 
of keeping money from going out of the country, and in the 
measure in which tariff brings about an excess of exports over 
imports, it has the effect of bringing money into the country 
(353). And even if the money due on exported goods is not 
brought home, but instead is invested in the importing country, 
an advantage accrues to the exporting country, because 
through the obligation to pay interest or dividends on the in- 
31 



482 CONCLUSIONS [352. 353 

vestment the country that imports becomes tributary to the 
country that exports. A so-called favorable balance of trade 
results either in the importation of money, or in the acquisition 
of a continuous revenue payable in money. 

352. Balance of Trade Co-related to Rate of Interest. — 
A difference in the current rate of interest prevailing in any 
two countries has a direct bearing on the balance of trade 
between them. There is a natural tendency to the investment 
of capital where its returns are greatest. "When in any country 
the rate of interest is low, there is a tendency of money to go 
abroad, where interest is higher. A transfer of money is 
generally effected by transfer of bank credit through bills of 
exchange. While the trade between two countries is even, the 
demand in both for such bills in payment of imports balances 
the supply, so that in reality no money need be sent either 
way, the imports paying for the exports. But when in one 
of the countries the importers' demand for exchange is aug- 
mented by the demand of investors, the exchange rate goes 
up. This adds to the cost of importing into low-interest 
countries and, of course, vice versa, and affords an impulse 
toward exportation of goods from low-interest countries, while, 
on the other hand, in high-interest countries the impulse is 
toward importation. 

A difference in the rate of interest is, of course, only one 
of the several factors which affect international trade balances. 
Where other factors of opposite tendency predominate, they 
may overbalance the normal effect of a difference of prevailing 
interest rates. 

353. Advantages of a Tariff. — The primary effect of a 
tariff is that of lessening foreign competition in the home 
market, and, as a result, the prices of the goods affected are 
higher than they would be otherwise. The increased price of 
such goods tends to stimulate their home production and cor- 
respondingly to stimulate the demand for labor. This is fol- 
lowed in normal sequence by a rise in the price of labor, in 
other words, by an advance of wages. But this stimulus con- 
tinues only to a point where the rise of wages corresponds to 
the rise of the general price level. In this respect the wage 



354] OLD PROBLEMS IN A NEW LIGHT 483 

earners, although getting higher wages, gain no advantage 
thereby (284). 

But there is another effect of a tariff which affords an 
actual gain to the wage earners. Through impeding the im- 
portation of goods it helps to that extent in producing a so- 
called ''favorable" balance of trade, which simply means that 
the money resources of the country, instead of being lessened 
through remittance abroad to pay for goods imported, are 
really increased through receipts of money in payment of 
goods exported (351). As a result, the monetary strain which 
depresses industrial activity is to that extent relieved and the 
demand for labor correspondingly augmented. This causes 
an increase of wages independent of that due to the rise of 
prices, and this item of the increase becomes a real gain to the 
wage earners of the country. 

It is thus apparent that the sole advantage of the tariff is 
but in the nature of a partial offset against the disadvantages 
resulting from the existing scarcity of the medium of ex- 
change. "With the currency system so organized as to permit 
the amount of currency automatically to adjust itself to the 
actual needs of industry and commerce, the demand for labor 
would become equal to its supply, tariff or no tariff. "Pro- 
tection" would then become useless as well as needless, and 
free trade would be to the interest of all. 

354. Trade Unions. — Quite on a par with the policy of 
placing obstructions on international commerce as a means of 
promoting domestic prosperity is the effort of trade unions 
to restrict the employment of labor as a means of benefiting 
the laborers. Both measures are resorted to as protection 
against what is supposed to be the effect of competition (346). 
In both cases the object is to raise wages ; in the one case by 
increasing the demand for labor and in the other by keeping 
down its supply. With this latter object in view, trade unions 
constantly strive for a reduction of working hours, resist in 
various ways the introduction of labor-saving devices, urge 
for the arbitrary restriction of immigration, insist on the 
limitation of the number of apprentices and endeavor to ex- 



484 CONCLUSIONS [355 

elude from employment all who are opposed to these measures. 

The justification of this policy is based on the mistaken 
idea, prevalent among wage earners, that it is the selfishness 
and greed of employers which is responsible for the existing 
unsatisfactory wage rates and the manifestly unjust distribu- 
tion of wealth. It is argued that employers obtain undue 
advantage by reason of the competition of workers for em- 
ployment, and that all measures for overcoming this advantage 
are justifiable. 

355. Labor Legislation. — ^It is quite natural that trade 
unions, in their effort to obtain for their members redress of 
those grievances which they consider to be due to the selfish- 
ness of employers, should endeavor to accomplish the end 
through legislation. 

Prominent among the statutes that have been enacted prin- 
cipally through these endeavors are laws limiting the working 
hours, not only of minors and of women, but also of men, 
laws eliminating or restricting the competition of convict 
labor with free labor, laws restricting immigration with the 
view of protecting workers already on the ground from the 
competition of others from elsewhere. 

While some of these measures are humanitarian in their 
tendency, the one common effect of all is that of extending 
opportunity of earning a living to workers who otherwise 
cannot find employment. But these measures, whether they 
limit the employment of minors, of foreigners or of convicts, 
or the hours of labor, cannot remove the cause which limits 
the employment of workers generally, and cannot therefore do 
more than better the condition of some workers at the expense 
of others. 

While a reduction of the time of labor is not only desir- 
able, but should be the natural result of the constantly in- 
creasing facilities of production, it is nevertheless futile to 
attempt to raise the wage level through a reduction of the 
hours of labor. A lasting improvement can be attained only 
by removing, through rational currency reform, the existing 
obstacle to the full employment of labor, so that the fear of 



356] OLD PROBLEMS IN A NEW LIGHT 485 

being left unemployed will no longer compel men to submit 
to unfair conditions. 

356. Arbitration of Labor Disputes. — Differences often 
arise between workmen and employer, as in questions of 
wages or of conditions of employment, which are not properly 
susceptible of adjustment by law, and in the effort to bring 
such disputes to an amicable conclusion, resort is often had to 
arbitration. This method is gaining ground to such an extent 
that the propriety of making it compulsory has many ad- 
vocates. Yet, when closely examined, arbitration in such cases 
is essentially irrational. 

Arbitration is quite in place in the case of international 
differences, or when a dispute arises over an existing agree- 
ment which admits of varied interpretation, or when, for in- 
herent reasons, the original agreement cannot be specific as to 
certain details, as in the case of fire insurance adjustments. 
In fact, the mediation of the courts in civil suits is essentially 
an act of compulsory arbitration. But when two parties are 
about to enter into an agreement regarding their future re- 
lations, such as an agreement regarding the rate of wages, it 
would seem to be most unreasonable to give to a third party 
the power to decide the terms of this agreement. 

The wage worker is really a seller of his services which the 
employer buys. His position is analogous to that of the mer- 
chant who offers his goods for sale, while the employer cor- 
responds to the merchant's customer. Suppose, now, that a 
merchant raises the price of his goods, and an old customer, 
considering the increased price too high, takes steps to transfer 
his patronage to the merchant's competitor. And suppose 
further that the merchant seeks to coerce the customer to con- 
tinue his patronage and proposes that a third party decide 
the price to be paid. This would no doubt be considered a very 
absurd proceeding. Yet, it is precisely parallel to a demand 
by workmen to have the rate of wages or some other grievance 
adjusted by arbitration. Those who advocate arbitration for 
fixing the terms of a contract regarding future relations of 
employer and employed are evidently at their wits' end in an 



486 CONCLUSIONS [357, 358 

effort to correct an evil, the cause of whicli they do not under- 
stand. 

357. Strikes and Boycotts. — When differences arising in 
labor disputes cannot be settled by conciliatory measures, and 
arbitration is not acceptable to both parties involved, organized 
workers frequently seek to enforce their demands by striking. 
Besides refusing to continue working on their employers' 
terms, they endeavor in various ways to keep others from doing 
so. Failing in this, they sometimes attempt to deprive the em- 
ployer of a market for his products through concerted meas- 
ures, known as "boycotting." 

Such proceedings, even if successful, cannot, however, 
permanently benefit the workers as a class. If they succeed 
in raising wages above the competitive level, the increase be- 
comes an addition to the cost of production and must therefore 
in the end fall on the workers themselves as consumers of the 
products, through a corresponding rise of prices (358), The 
condition which is the ultimate cause of low wages remains 
unchanged, and though the nominal rate of wages be sustained 
at a higher level by these means, the actual rate of wages re- 
mains the same, the rise in the nominal rate of wages being 
balanced by a general rise in prices. 

A permanent cure for the prevailing industrial discon- 
tent can be hoped for only through the removal of its funda- 
mental cause. When capital has no longer the power to com- 
mand an unearned revenue, it will become generally recog- 
nized that all measures which in any way restrict industrial 
freedom are inherently wrong, and this applies not only to 
laws restricting the processes of exchange, but likewise to 
strikes and boycotts which interfere with the natural processes 
of production and distribution, 

358. What Trade Unions Accomplish. — Trade unions 
have their prototype in the trade guilds of the Middle Ages, 
which were originally organized to protect their members 
against the encroachments of their overlords. But in course 
of time, after overcoming feudal oppression, they became op- 
pressive in their turn. Having acquired certain privileges, 
they so regulated admission to their ranks that the number of 



858] OLD PROBLEMS IN A NEW LIGHT 487 

"masters" that might establish themselves in business was 
rigorously limited, and in this way they restrained competition 
in their respective fields. 

In the development of trade unions we have a striking 
example of history repeating itself. In the early stages of 
modern industrialism, following the invention of the steam 
engine, wages were at the starvation point and the hours of 
labor so long as to leave barely time for needed sleep. Under 
the stress and burden of the abject condition to which the 
masses of the working class were thus reduced, the workers 
strove to obtain justice by united action, but their efforts were 
at first obstructed by the enactment of laws forbidding the 
formation of labor unions. Through persistent agitation 
against this despotism the working classes succeeded in the 
course of the nineteenth century in having these legal obstacles 
to their organized efforts completely removed. 

It was not long, however, before success in this direction 
was followed by a change in the attitude of the trade unions, 
from a striving for greater freedom for themselves to a striv- 
ing for lessening the freedom of others. From a position of 
justifiable defence and insistence on equal rights, these unions 
have gone to the length of subverting equal rights, not only 
of employers, but of feUow workers as well. Having gained 
freedom for themselves, they have in their turn become op- 
pressors through placing obstructions against industry, in the 
vain belief that they can thereby be permanently advantaged. 

Trade unions are considered by many who have the well- 
being of wage earners at heart as necessary to conserve their 
rights. This conviction, however, rests on a misinterpretation 
of certain facts. 

Since the beginning of the nineteenth century the economic 
and social conditions of wage earners have been vastly im- 
proved. "Wages have been increased, the time of labor short- 
ened and the social standing of workmen greatly enhanced. 
The same period also marks the rise of labor unions. More- 
over, wages in well organized trades are, as a general rule, 
higher, and the time of labor shorter, than in trades and occu- 
pations which are not so well organized. This is claimed to 



488 CONCLUSIONS [358 

prove that the betterment in the position of the wage earners 
has been due to the efforts of trade unions, and that these 
bodies are necessary to maintain the economic advantages 
which labor has gained. And yet, this inference is not justifi- 
able and rests on a mere coincidence of facts. 

We have found (347) that wages equal the value of the 
product of labor less that quotum which is acquired by 
capital. It follows, then, that wages can be permanently in- 
creased only in two ways, namely by increasing labor's pro- 
ductivity, or by reducing the quotum which goes to capital, 
or, of course, by both processes combined. 

Now, it is clear that the increase in the productivity of 
labor which has taken place in the course of modern industrial 
development has been due entirely to inventions and discov- 
eries, and the processes through which these were made avail- 
able. It is through progress in this line that the worker is 
enabled to produce far more goods wth less labor than ever 
before. But what have labor unions done? They have per- 
sistently opposed, both actively and passively, the introduction 
of devices and methods for increasing the output of labor. 
Trade unions certainly cannot claim to have increased wages 
through increasing the productive capacity of labor. 

Nor have they done aught to reduce the quotum which 
capital obtains through its grip on the industrial world. In- 
stead of aiding the employer to overcome the handicap which 
makes him a tool in the process through which capital obtains 
an undue share of the products of labor (348), these unions 
have actually added to the difficulties of the employer and 
strengthened the power of capital. Although it is not im- 
proper for them to insist on the enactment of laws compelling 
payment of wages in legal money, these laws act as a boomerang 
in the absence of such additional measures as are necessary to 
make the volume of currency adequate for the purpose. "With- 
out these additional measures the domination of the financier 
over the industrial world is only strengthened by laws which, 
however desirable and proper, like those forbidding payment 
of wages in store orders, add to the demand for currency. 
The truth is that the increase of wages and the betterment of 



358] OLD PROBLEMS IN A NEW LIGHT 489 

the condition of the wage earning class which has come with 
the progress of modern invention has been brought about, not 
through trade unions, but in spite of them. While the progress 
of invention has tended to increase the purchasing power of 
wages, the effort of trade unions has tended to increase prices 
in the same proportion in which it has succeeded in raising 
money wages. 

It is true, as above noted, that, as a rule, wages in strongly 
organized trades are higher than in those of less complete 
organization, assuming, of course, that the trades compared 
are those in which wages would otherwise be equal. Where 
the unionizing of a trade is incomplete, those employers upon 
whom its forces are effective must ultimately throw off this 
burden or go down under the competition of other employers 
who are not under trade union restrictions. It is only in 
trades where all employers are affected alike, and where com- 
petition is therefore equalized, that an artificially raised level 
of wages can be maintained. But in this case the marginal 
cost of production is correspondingly increased, and the price 
of the product rises accordingly. It follows that not employers 
nor capitalists, but only consumers, including all classes, pay 
the increase in the end (149, 357). 

So long as the wage level of only certain trades, and with 
it the price of their products, is held up through the efforts 
of trade unions, the workers in those trades will gain more as 
producers than they lose as consumers. The reason is clear. 
While the wages in their own trade are held up to an artificial 
level, the prices of only some of the products of which they 
are themselves consumers are being similarly held up. On the 
other hand, the workers in the ununionized trades are suffer- 
ing a disadvantage through having to pay a higher price for 
the products of the unionized trades out of the merely normal 
wages of their own trade. 

It is therefore apparent that wage earners would not gain 
anything, were all trades completely unionized and the wage 
level thus artificially raised throughout. The natural result 
would be that all products of labor would rise in price in full 
proportion to the rise in wages. And this is all that could be 



490 CONCLUSIONS [358 

accomplished in this direction by the complete organization 
of labor for which labor unions are striving. The increase in 
money wages being attended by a proportional increase in 
prices, the purchasing power of wages would in the end be the 
same as before. The efforts of the trade unions cannot per- 
manently bring to the wage earner a larger share of the 
products of labor than he would otherwise obtain. 

Only for a short period following an increase of wages 
that has been brought about through the concerted efforts of 
trade unions can wage earners as a class be gainers. Em- 
ployers who before such raise of wages could just make ends 
meet are thereafter forced either to raise the price of their 
goods or quit business. In the latter case a rise of the price 
would naturally follow by reason of the reduction of the 
supply. While the employer has to make good the excess of 
wages for a while, the ultimate effect upon the market is that 
the consumers pay the advance in wages, and capital gets as 
much and labor as little as before. 

The restraint of competition by a combination of wage 
earners as a means of increasing wages appeals to wage workers 
as very promising. But far from being an antidote or cure for 
the prevailing injustice in the distribution of wealth, it is 
only a "will o' the wisp" which the wage earner pursues in 
the vain hope that it will lead him out of the "slough of 
despond" in which he finds himself bemired. Not until both 
workmen and employers come to understand that the under- 
lying cause of the prevailing economic injustice is the arbitrary 
limitation of the volume of currency and the consequent 
creation of the abnormal power of money, will they see their 
way to the proper remedy. As it is, and as it has been through 
generations past, employers see no other way than to combine 
to restrict competition for their own benefit, and worlanen see 
no other way than to combine for the like end. While they 
waste their energy in endless contentions, each side seeking to 
combat force with force, monopoly with monopoly, they con- 
tinue to be an easy prey to their common enemy, the unnatural 
power of money. This they can overcome only by obtaining 
for themselves the right of free exchange, a right for which 



859] OLD PROBLEMS IN A NEW LIGHT 491 

they are now compelled to pay to the money power a toll which 
continually increases until, through the exhaustion of exchange 
facilities and the overwhelming accumulation of debt, industry 
is brought to a halt. 

359. The Single Tax. — The proposition to abolish all taxes 
save that on land, urged by various thinkers at various times, 
has been made the central idea of the so-called "single tax" 
propaganda, popularized by Henry George and formulated in 
his noteworthy work "Progress and Poverty." During 
George 's lifetime this movement made rapid strides and gained 
many followers, but since his death its progress has been slow. 
This is no doubt due to the fact that the reasoning by which 
he seeks to prove that the measure which he proposes as a 
remedy for low wages is open to question. The main line of 
his thesis is sound and the faults of the present system of land 
tenure are clearly set forth ; but at the same time the nature 
of both capital and interest is wholly misconceived. Never- 
theless, the work of Henry George has borne good fruit. His 
presentation of the land tax doctrine has left an indelible im- 
pression on modern economic thought. In various countries, 
as in Australia and New Zealand, and in individual localities, 
as in parts of Germany and of British Columbia, some initial 
steps have been taken toward incorporating the tenets of the 
single tax into law. The effect of these measures on industrial 
conditions has, however, fallen far short of those benefits that 
must have accrued if the single tax were indeed a cure for 
poverty, as George and his followers have maintained. 

The aim of the single tax proposition, briefly stated, is the 
absorption of the entire economic rent by the state through 
taxation, leaving to the owner of the land no portion of the 
rent as such, but only a due compensation for his services as 
agent in the process of collecting the rent for the government. 
All other taxes would then become superfluous and would con- 
sequently be abolished. It is proposed to start by taxing only 
the land and not the improvements thereon, and to gradually 
increase the tax until the value of the land disappears. 

This measure is advocated on the ground that the value of 



4d^ CONCLUSIONS [360 

land is not due to any effort on part of the landowner, but 
arises from the growth of population and from the improve- 
ments made on the surrounding land. Land has not been 
produced by labor and, being the inheritance of all alike, it 
cannot rightfully become private property. 

Henry George recognized that his proposed remedy would 
be of no avail if the landlord, on being called upon to pay a 
tax equal to the economic rent, could add this charge to the 
price of the produce of the land in case he cultivates it him- 
self, or to the stipulated rent in case the land is let to a tenant. 
This author therefore reiterated Kicardo's demonstration 
that the imposition of this tax could not affect the value of the 
things produced on the land, nor could the landlord raise the 
rent on the tenant. The rent depends on the price of the 
produce and not vice versa (172). By the confiscation of the 
rent no burden is placed on the marginal producer, for he 
gains no rent and pays no tax, and the price of the product is 
determined by cost at the margin. 

This proposition can be illustrated by the diagram Fig. 20. 
Let us single out the element q', which is produced at a cost 
equal to q's'. By imposing a tax equal to s'r' on the production 
of this element, the gross cost of its production rises to q'r'. 
Treating every element in the same way, the effect will be that 
the gross cost of all elements is equalized, and the price qa 
remains unaffected, 

360. Ethical Status of Land Ownership. — That the 
economic rent of land should properly accrue to the com- 
munity through taxation is confirmed by our investigation, 
although we reached the conclusion by a distinctly different 
line of reasoning. But the inference that, as a result of such 
taxation, the value of land would shrink to the vanishing point 
does not agree with our conclusion on the subject and is evi- 
dently derived from the erroneous assumption that land can 
have a market value only if it returns a continuous income, 
an assumption which is on a par with the unwarranted sup- 
position, sometimes set forth, that money has a value only by 
reason of its power to command interest (65, 107). 

In view of the fact that the author of "Progress and Pov- 



860] OLD PROBLEMS IN A NEW LIGHT 493 

erty ' ' considers capital interest as altogether right and proper, 
it was but natural that he believed the value of land would 
disappear through taxing it to the extent of the entire economic 
rent. According to his premises the proposed reform would 
be not only a confiscation of the rent, but of the value of the 
land as well. Recognizing that this outcome of the proposed 
measure has the appearance of injustice, especially to those 
landowners who acquired their title by purchase, he proceeds 
to justify his proposition as follows : 

Beginning with the premise that land is not a product of 
labor, but a gift of the Creator to the entire community of 
mankind, he argues that land cannot, in the nature of things, 
rightfully become private property. Those who first obtained 
control of the land as private property virtually robbed the 
community of it. Applying the same rule as that which gives 
to the original owner of a stolen thing the right of recovery, 
even from an innocent purchaser, George concludes that de- 
priving land of its market value through the appropriation of 
the economic rent by the community is but a restoration of 
the value of the land to the community and therefore not in 
conflict with justice. 

But this is not a true parallel. The holders of land have 
not obtained their possessions by way of theft or robbery, but 
by preemption or by way of gift from the controlling power. 
In either case the ownership of land must be viewed as re- 
sulting through an agreement between the land holder and the 
state, taking the form of law. "Whether the state exists in the 
form of an autocracy, an aristocracy or a democracy is here 
immaterial. That these agreements and the laws which define 
them have developed inequitable features, unforeseen at 
first, is no reason for proceeding, at a later date, to confiscate 
whatever value the land may have acquired. The fact remains 
that our ancestors, in their ignorance of what the future had 
in store, have permitted some individuals to acquire private 
ownership of land without imposing such conditions as alone 
would make such ownership equitable, and we are bound by 
their action, morally as well as legally. A bargain made in 
good faith, however unwise it may be, must stand; that it 



494 CONCLUSIONS [361 

subsequently is found to have been ill advised affords no right 
to repudiate it. All that may reasonably be done is to allow 
the landowners to keep the value that has legally become theirs 
and to take such measures as will for the future deprive land 
ownership of its present power to bring unearned incomes to 
the owners. 

We have already observed that Henry George considered 
the interest-bearing power of capital as natural and just. For 
this reason he did not realize that the absorption of the entire 
rent through taxation can be brought about by a reform of the 
currency, and this without the elimination of the value of land 
(328). 

361. Henry George's Theory of Business Fluctuation. — 
Convinced that the existing system of private land ownership 
is the prime cause of all the greater evils that afflict the social 
organism, it was but natural that Henry George should have 
proposed the single tax as a cure for business depression and 
as a means for raising wages to the highest possible level. He 
therefore felt impelled to trace business depressions to the 
present system of land tenure, and here follows in brief what 
he says on this subject : 

As a rule, the current value of land is in excess of what can 
be accounted for by the present capacity of the land for return- 
ing rent. This excess is the speculative value which is due to 
the expectation of a future increase of its rent (183) , an expec- 
tation based on general experience. In anticipation of this 
future development, land which is not yet within the margin 
of cultivation is appropriated and held for the rise. 

As population increases, the man who sets out in search for 
the margin must therefore pass for long distances through half- 
tilled farms before he reaches a point where land can be had 
free of rent. When he settles, he will in turn take up land, 
and those who follow are forced farther on, carrying the mar- 
gin of cultivation to still more remote points. Through these 
speculative appropriations the margin is pushed out and the 
rent thus increased, crowding down wages and interest to a 
point below which labor cannot exist nor capital be maintained. 
Production, therefore, begins to stop and the paralysis is com- 



OLD PROBLEMS IN A NEW LIGHT 495 

municated through all the interlacings of industry and 
commerce. 

The period of depression thus ensuing will continue until 
either (1) the speculative advance in rent has been lost; or (2) 
the increase in the efficiency of labor, owing to progress of 
improvement, has enabled the normal rent line to overtake the 
speculative rent line; or (3) labor and capital become recon- 
ciled to smaller returns. The rent will begin to advance again, 
a speculative advance will again take place, production will be 
checked, and the same round be gone over,^"^ 

362. Analysis of This Theory. — This explanation of busi- 
ness fluctuation is based upon premises which cannot be sus- 
tained. The assertion that land is deliberately held out of use 
by the landowner while he is waiting for a rise is not generally 
true. The display of human nature as here presented is 
unnatural and unreal. 

There can be no question but that it is the desire for acquir- 
ing wealth which impels the acquisition of land by those who 
do not purpose using it themselves. In view of the fact that 
land yields gaius in two ways, namely through rent and 
through increase of its value, it would obviously be to the 
interest of landowners to make both sources of gain available. 
But in George's theory it is assumed that the average land- 
owner will neglect getting the rent, while his heart is set on 
getting the increment. This assumption is manifestly not 
tenable as a basis of economic theory. It is not necessary to 
hold land out of use for the purpose of gaining the unearned 
increment ; nor will this increment become greater by allowing 
the land to lie idle. The landowner has in fact no inducement 
to hold the land out of use; on the contrary, he has every 
reason for putting it to the best possible use under the circum- 
stances, so as to obtain the rent in addition to the increment. 
Even though land has been appropriated, it is not for that 
reason held idle, but is generally obtainable for use in return 
for the economic rent, that is, in return for a rent which the 
highest bidder is willing to pay. Nor could these terms of 

"^Cf. George, pp. 184 ff. 



496 CONCLUSIONS [3658 

occupancy be improved by enacting the single tax proposition 
into law, for land could not be obtained for use on more 
favorable terms under that system. 

In aU these considerations we can deal only with general 
tendencies, to which, in the nature of things, exceptions con- 
stantly occur. These exceptions afforded Henry George occa- 
sion copiously to illustrate his thesis. But the comparatively 
few instances of land being held out of use for speculative 
reasons are far outnumbered by the many in which the land- 
owners strive to put their holdings to the best possible use, 
either through their own efforts or through leasing it to 
others. It is therefore illogical to conclude, as he does, that 
the speculative holding of land has a tendency to remove the 
margin of used land beyond the normal rent line. That there 
is always some unused land within the margin and some used 
land beyond is inevitable in the course of things. But the 
average condition is not affected by such instances, which are 
comparable to the crests and troughs of the waves in a storm- 
tossed sea. There are rises and falls on the surface of the water, 
but its average level is not affected by the storm. 

Where large tracts of land are used as private preserves, 
the conclusion that the actual margin is thereby pushed out 
is undoubtedly correct. But such abstraction of land from 
economic use is not due to speculation, and it is safe to say 
that it occurs mainly where the owner derives unearned in- 
come from other land rented to tenants, or from capital in 
some other form. Such abstraction of land will therefore 
come to an end when capital loses its power to command an 
unearned income. 

It often happens that in the midst of highly cultivated 
surroundings or in central locations of cities some plots of 
land are put to a less advantageous use than the situation 
would warrant, and it appears that Henry George, observing 
such cases and thinking that they confirmed his theory, at- 
tributed them to sheer speculation on the part of the owners. 
An illustration will suffice to show that such cases are un- 
avoidable in the normal course of events, especially in rapidly 
progressing communities. 



363] OLD PROBLEMS IN A NEW LIGHT 497 

Let us imagine a block of buildings near the centre of a 
growing city, buildings which were erected when the city was 
yet but a town and which are little more than shanties. The 
growth of population calls for better and more commodious 
buildings, and such are growing up in the new sections of the 
city. Many smaller houses in the old parts of the town are 
still in use, and for the time it pays better to build new resi- 
dences on the outlying empty lots than to demolish the older 
dwellings nearer the centre and replace them by more modern 
structures. Meantime the business centre of the city expands. 
In some streets stores appear with attractive show windows. 
In other quarters factories spring up. Here large office build- 
ings arise, and there theatres or bank buildings make their 
appearance. 

Returning to our block of antiquated buildings, we find 
their owner observing the changes going on in all directions. 
He also desires to improve his lots, but how? He may be 
ready to meet any real demand for improvements, but who 
knows whether the location, in the midst of progressive changes, 
will warrant the erection of dwellings, or of stores, or of 
factories ? A mistake of judgment in this respect might entail 
a loss far exceeding the loss of rent while waiting for develop- 
ment. Thus the old buildings remain standing in and about 
the centre section of the city for an indefinite space of time, 
only to give way finally to buildings which will put the various 
sites to their most economic use. 

There is every reason to suppose that similar conditions 
would prevail under any proposed application of the single 
tax principle. The assumption that land which is not put to 
its most economic use is being deliberately held down by the 
owner in calm anticipation of the unearned increment is 
largely a figment of the imagination, and while there are 
indeed here and there exceptional instances of such holdings, 
these exceptions are too insignificant to make the explanation 
of business stagnation offered by Henry George at all reason- 
able. 

363. Discrepancy between that Theory and Facts. — The 
inadequacy of the theory on which business depressions are 
32 



498 CONCLUSIONS [363 

traced to the private ownership of land is further apparent 
from the discrepancy between the theory and the facts. If it 
were true that it is the holding of land out of use that hampers 
business, then periods of depression would be marked by the 
impossibility of obtaining raw material in sufficient quantity 
to meet the demand. We know, however, that this is not the 
case. 

While Henry George realizes that — 

All trade is the exchange of commodities for commodities, and 
hence the cessation of demand for some commodities, which marks the 
depression of trade, is really a cessation of the supply of other com- 
modities,*"* 

he fails to point out any commodity of which, as he says, the 
supply has ceased. Surely, there are no facts to indicate that 
the supply of products obtained directly from land is insuffi- 
cient during periods of industrial depression. On the con- 
trary, as noted above, there is no scarcity of raw products gen- 
erally during such periods. If there were such scarcity, the 
excessive demand would at once drive up the prices of these 
raw products, stimulate the cultivation of land and increase 
rent. Landowners would eagerly put their land to profitable 
use, and stagnation could not drag on for years, as it does. 
Obviously, the theory does not agree with the facts of the case. 
Suppose the water supply in some one quarter of a town is 
deficient. An expert, seeking to locate and correct the trouble, 
examines the pressure of water at a number of accessible points 
in the locality and finds the water pressure high at one point 
and low at the next. He therefore naturally concludes that 
the conduit is choked somewhere between. Let us apply this 
test to trade stagnation. In the hands of the manufacturers 
and merchants we find the supply of goods congested to such a 
degree that the condition is generally designated as ** over- 
production." They all want to seU. The obstruction which 
we are to locate is not to be looked for at an earlier point 
in the process of production. It must be at a point beyond. 

*•« George, p. 193. 



364] OLD PROBLEMS IN A NEW LIGHT 499 

On the other hand, the consumers, particularly the work- 
men, are in need because they cannot buy. There are too 
many sellers and too few buyers. On the one side of the 
point of sale we find congestion or excessive accumulation; 
on the other side we find deficiency and want. Evidently, 
the obstruction lies somewhere between; the impediment is 
in the channels of exchange. The commodity, in the sup- 
ply of which a "cessation" has occurred, is not, as Henry 
George supposed, the produce of land, but something very 
different, namely the medium of exchange. And so long 
as the law puts arbitrary limitations on thQ use of assured 
credit as a medium of exchange, the under-supply cannot be 
remedied, and numbers of workmen must remain unemployed. 
364. Single Tax not a Remedy. — While the fundamental 
object of the single tax, namely the acquisition of the economic 
rent by the community instead of by the individual landowner, 
is justifiable in every respect, the measure would be practically 
useless as a means of correcting the most serious of our in- 
dustrial ills. The power of money to acquire unearned wealth, 
the power without which land ownership could not afford un- 
earned acquisitions, would still remain in force. Experience 
shows plainly that the landowner as well as the producer is 
subject to the dominance of this power. Business enterprises, 
especially those of large magnitude, fall gradually under the 
control, not of the owners of land, but of so-called ''financiers," 
manipulators of money and monetized credit (338). If the tax 
on land were to replace all other taxes, and the ideal of the 
advocates of the single tax were realized, it would soon become 
apparent that the economic evils from which we are suffering 
had not thereby been cured, and that the working classes had 
not been benefited. Another reform would still be needed, 
namely that of doing away with the existing obstacles in the 
process of exchange (329). On the other hand, were these 
obstacles first overcome, the landowners would find them- 
selves unable, under the dominance of competition, to retain 
any portion of the economic rent (328), and the aim of the 
single tax would thus be incidentally attained. 



500 CONCLUSIONS 1365.366 

365. Socialism. — Discussion of socialism is beset with pecu- 
liar difficulties, chiefly because of the fact that the leading 
authorities on the subject do not agree in their statements of 
its propositions. There is so wide a divergence in the various 
programs advanced in the name of socialism that it would be 
practically impossible to review them all. We shall here con- 
fine ourselves to a consideration of that plan of social reor- 
ganization which is most generally advocated by socialists and 
through which equity in the reward of labor is to be attained, 
namely the ' ' common ownership of all means of production, ' ' 
including, of course, land, so that only consumption products 
become subject to private property. Through that common 
ownership it is assumed that ' ' the modern wage system will be 
abolished ' ' and ' ' competition will be replaced by co-operation. ' ' 

None of the schemes of so-called socialism is even reason- 
ably definite as to the ways and means of inaugurating and 
maintaining the proposed socialistic state. Its authoritative 
exponents insist that no one can be expected to know the 
future, and that the details of the process will naturally 
develop in practice. They propose, in effect, to cross the 
bridge which spans the chasm between the present world and 
their Utopia when* they come to it, failing to realize, in their 
enthusiasm, not only that there is no such bridge, but also that 
they have not even planned out a way of building one. 

The advocates of socialism are, however, to be credited with 
a realizing sense of the fact that the present social order is 
somehow out of joint. To recognize the existence of a wrong 
is the first step towards reform. 

As a physician, when called to a patient, has first to observe 
the symptoms before he can diagnose the case and prescribe 
the correct treatment, so must reformers first observe those 
facts which reveal the morbid condition of the social organism. 
This first step the socialists have correctly taken. But in the 
next step, in the diagnosis, they have erred, and consequently 
in their prescription they have gone amiss. 

366. Theory of Socialism. — The theory presented by Karl 
Marx in his work "Das Kapital" is the only thoroughgoing 
attempt to propound a scientific basis for the proposition of 



366] OLD PROBLEMS IN A NEW LIGHT 501 

socialism. His theories of value, of wages and of "surplus 
value" or interest, have been discussed at some length in our 
earlier chapters (164, 207-208) and have been found to be 
unsound. It is therefore not necessary to repeat these argu- 
ments here. 

Were the reasoning of Karl Marx correct, the abolition of 
the private ownership of capital would indeed be the only 
effective remedy for the present industrial ills. According to 
his thesis nothing short of collective ownership of the means 
of production can prevent the acquisition of ' ' surplus value ' ' 
by the individual owners of capital and make it possible for 
the workers to get the full reward of their labor. That reward 
can come to them only through the institution of the *' Co- 
operative Commonwealth." Competition, which characterizes 
the individualistic system, is considered to be the means 
through which capital is enabled to acquire the "surplus 
value." This competition is branded as the weapon of the 
strong in the everlasting warfare of commerce. Production 
and exchange, it is maintained, instead of being carried on to 
provide the requirements of life, develop into a scramble in 
the market, in which the insatiable hunger of the possessors 
of capital for "surplus value" is the sole incentive to pro- 
duction. More things are accordingly produced than required, 
and the market becomes overstocked with products for which 
there is no demand. It is urged that the ' ' competitive ' ' system 
must give way to a " co-operative ' ' system of production, which 
is to be directed and regulated by competent authority, so that 
production shall be adapted to demand. Some socialists go 
even so far as to dissuade wage earners from saving, and rather 
to cultivate a higher standard of living, so that the amount of 
labor "socially necessary" for the maintenance of "labor 
power" shall be increased, and with it the wages of labor, 
while the share going as "surplus value" to capital is cor- 
respondingly reduced. 

These and other similar arguments indicate the confusion 
of ideas upon which the reasoning of socialism is based. First 
and foremost, we have the fact that competition and co-opera- 
tion are not antithetical, as socialism assumes. They are in 



602 CONCLUSIONS [367 

reality complementary, inasmuch as freedom of competition 
develops co-operation. Competition can be regarded as bane- 
ful only by those whose diagnosis of existing conditions fails 
to go below the surface. The regulation of production, so that 
supply shall be properly adapted to demand, never can be 
effected through prescribed regulation so well as through the 
processes of untrammeled competition (148). The notion that 
the level of wages can be raised by deliberately raising the 
standard of living is a palpable case of putting the cart before 
the horse and, at the same time, directly conflicts with the 
socialistic theory that under the individualistic system the 
wages of the least skilled laborer are held down to the point of 
bare subsistence. 

367. Impracticability of Socialism. — The various efforts 
to give a coherent foundation to the propositions of socialism 
have all failed. As to the ways and means of carrying the 
idea into practice, no definite proposition has yet been gen- 
erally agreed upon by its advocates. 

The problem which confronts socialism is of a twofold 
nature. In the first place, it is necessary that some practicable 
plan be devised for turning the present industrial system into 
a socialistic one. And that once done, there must be mapped 
out some way of maintaining the new order of things. 

It is manifest that the transition can be effected only in 
two ways, namely, either by turning one enterprise after 
another through private initiative from a competitive to a 
co-operative organization, or through the acquisition of all 
means of production by the community at large. 

Of these two methods the first is clearly in the direction of 
least resistance and therefore the most practicable course. 
There is nothing whatever in the way of turning an existing 
industrial enterprise from a competitive into a co-operative 
organization, or of establishing a new one upon this basis. 

Suppose that a number of workers acquire or establish and 
operate a manufacturing or distributing business with capital 
of their own. They may then agree that the entire net in- 
come shall be distributed among themselves as compensation 
for their services. Whatever ''surplus value" there might be. 



367] OLD PROBLEMS IN A NEW LIGHT 503 

would thus go to them and increase their wages. It is plain 
that if the theory of socialism had any validity, such co- 
operative organization would easily overcome the competition 
of institutions organized on the competitive or so-called cap- 
italistic plan, and the socialistic regime would thus come about 
in a normal sequence by way of gradual evolution. 

It may be alleged that this plan of socializing industry is 
fraught with difficulty, inasmuch as workers generally are not 
possessors of capital and therefore cannot successfully carry 
out this plan. But this objection is not valid. Workmen 
banded in unions do not hesitate to enter into a conflict with 
the competitive system by striking, thus deliberately sacrific- 
ing their income and drawing upon their capital previously 
saved from their wages. Why not use this capital in the 
formation of co-operative organizations which shall own the 
capital they use, and let these gradually displace the capital- 
istic concerns which continue to compete with them? This 
done, the establishment of the socialistic state could be effected 
by amalgamation of all co-operative organizations into one. 

The fact, however, is that while co-operative enterprises 
have been actually established time and again, and while some 
of them have measurably prospered and continue in existence, 
they have failed to convert the industrial world to their 
methods. 

The alternative course is to substitute communal action for 
private initiative and to obtain the end through the acquisition 
of aU means of production by the community. It is often 
pointed out by advocates of socialism that much has already 
been done in this direction. The postal system, the highways, 
some canals, the public schools and numerous waterworks and 
gasworks are owned and operated by the community. From 
this it would appear that the conversion of our social system 
into a socialistic state is actually in progress. The next step 
would seem to be the acquisition and operation of the entire 
transportation, telegraph and telephone systems by the govern- 
ment, and eventually of all means of production used in in- 
dustry and commerce. 

If this scheme of socialization could really avail to improve 



504 CONCLUSIONS [367 

the condition of tiie masses of the people, and particularly the 
industrial classes, then the extensive nationalization of the 
means of transportation and communication which has already 
taken place in various European states should have proven 
of marked benefit to the wage earners. 

These expectations, however, have not been realized; the 
condition of European workers has not been bettered by this 
policy in a manner or degree that would tend to confirm the 
socialistic theory. Its defenders have therefore taken the 
ground that such governmental ownership of industries as has 
hitherto been exercised is not socialism, but merely a form of 
capitalistic or plutocratic monopoly. But in the absence of 
any explanation of the difference between this government 
ownership and ideal socialism, it can only be inferred that the 
refusal to recognize the former as essentially socialistic is 
simply due to the fact that the expected results have not been 
realized. 

One other way of reaching the goal of socialism has been 
suggested here and there as the final necessity of the situation. 
It is the forcible expropriation and confiscation of all in- 
dividually owned capital by the community. A serious con- 
sideration of this proposition need not detain us. 

It is to be observed at this point that while there is no 
law forbidding the formation of co-operative enterprises with 
the view of realizing the dream of socialism, the free utiliza- 
tion of credit as a medium of exchange, to which our investiga- 
tion points as the only way to attain social justice, is effectu- 
ally prevented by legal obstacles. Were the theory of socialism 
correct, the socialistic state would naturally evolve under the 
operation of the law of the survival of the fittest. But the 
free monetization of credit is made impossible by the provisions 
of our monetary laws. 

The second problem that confronts socialism is that of 
maintaining the socialistic order after it is inaugurated. A 
number of questions must be satisfactorily dealt with, if the 
socialistic state is to endure. 

It is of course assumed that all men physically able would 
be engaged in some work. But putting aside all questions as 



367] OLD PROBLEMS IN A NEW LIGHT 505 

to how the work is to be organized and the various tasks 
allotted, the manner as to how, and in what quota, the products 
are to be distributed must be definitely worked out. There 
are manifestly but two alternatives. Either the workers must 
be paid wages, whether in money or in orders of some kind, 
with which to obtain from the general store what they desire, 
or some other plan of sharing the products on the basis of 
communal ownership must be put in practice. 

If the distribution is to be effected through some medium 
of exchange given in return for service, in other words, through 
payment of wages, the amount of the wage must be determined 
somehow. If that amount is to be decided by official rule, how 
is that rule to be applied.? Is a distinction to be made between 
the skilled and the unskilled, the intelligent and the stupid, 
the diligent and the lazy? If so, who is to be the judge? 
Furthermore, how and by whom are the prices of the products 
to be regulated? And if the prices are to be regulated by 
official action, how is that action to be determined ? 

Whatever might be the details of the system, these must 
be in harmony with the fundamental principle of socialism, 
namely communal ownership of all means of production, trans- 
portation and communication, which necessarily implies that 
all products of industry shall primarily belong to the com- 
munity, from which the individual is to obtain what he wants 
in exchange for his wages, and that these wages shall in some 
way be decreed by the state. The state being the sole em- 
ployer, the individual worker can have no alternative but to 
be employed by the state, and from the decree of the state he 
can have no appeal but to the state itself. The principle of 
individualism that everyone shall have the right to dispose of 
the products of his own labor is to be abolished in the system 
of socialism. If it is nevertheless proposed that the products 
shall be shared out in proportion to merit ; if the principle of 
socialism is to be : ' ' From each according to his ability and to 
each according to his merit," the advocates of socialism have 
failed to point out a reasonable plan for gauging individual 
merit, especially as regards efforts which are essentially 
different in their nature. 



506 CONCLUSIONS 

368. Communism. — The other alternative in the distribu- 
tion of the products of labor would be a system in which all 
forms of private ownership are to be abolished and all forms 
of wealth owned in common. Under this system every mem- 
ber of the community is to do some share of the work, and in 
return each is to have a share of the things produced. The 
general idea of communism, as distinguished from socialism, 
appears to be expressed in the motto usually put forth by its 
advocates : ' ' From each according to his ability, to each accord- 
ing to his wee(Zs.^' 

To persons of an emotional nature, whose feelings go 
deeper than their reasoning, this proposition is so attractive 
that innumerable attempts have been made to put it in prac- 
tice. But so far, all experiments of this kind have ended in 
failure. The various enterprises started on this plan that 
lasted any length of time gradually abandoned the principle 
of communism and ultimately developed into some form of 
joint stock organization. 

The cause of the failure of communism is not far to seek. 
The existing supply of the things produced being open to all 
comers, according to their individual needs, the first question 
that comes up is as to who is to determine those needs, and 
how. The next question is, how is each member of the com- 
munity to be brought to do that which is needed to be done for 
the community at large, in other words, how can the supply 
of products be adjusted to meet the call for them? For in- 
stance, suppose the members of the community who have 
chosen to be shoemakers is only half enough to meet the call 
for shoes, are they to work double time to make up for the lack 
of their numbers? Under the individualistic system the in- 
sufficient supply of shoes would cause a rise in their price and 
so increase the recompense of shoemakers above the average. 
This would attract new workers to their ranks and so bring 
down the price to the general level. The economic force that 
tends to adjust recompense to effort is absent in every plan 
of communistic organization. The communistic system re- 
quires of the individual practically total self-effacement and 
the abandonment of all expectation of material reward for 



OLD PROBLEMS IN A NEW LIGHT 507 

exceptional services. Experience has amply proved that while 
men may consider themselves in some measure requited by 
honors and distinction for some signal service rendered the 
community, continued efforts of an exceptional nature cannot 
be looked for unless there is present the further incentive of a 
material reward. 

Nevertheless, the idealist finds himself constantly obsessed 
by the question as to why should a man whom nature has 
endowed with more than average intelligence enjoy more com- 
forts and luxuries than his less talented fellow man? It is 
not a man 's fault that he lacks talent ; it is his misfortune. If 
it is proper, as we have found (325), that the advantages 
which nature has bestowed upon land should belong to the 
community, why should not also the talents which nature has 
bestowed on individuals belong to the community? 

"When closely examined, the two cases are found to be 
essentially dissimilar. Land is held in private ownership by 
virtue of a social compact through which the owner acquires 
the exclusive right to the land and its usufruct. He gets the 
latter, whether he himself utilizes the land or transfers its 
occupancy under lease to another. 

The natural endowments of an individual, on the other 
hand, are not held by virtue of any concession, communal or 
otherwise, nor can they be put to use by anyone but the in- 
dividual himself. The protection which the community affords 
him through the operation of law is only such as it accords to 
every other individual. The community cannot endow a man 
with talent, and no law is needed to protect him in its pos- 
session. Besides, exceptional skill may be acquired through 
patient and long continued effort, instead of being a mani- 
festation of natural endowment. Is it proper that a man who 
diligently attends to his work should be made to share with 
the man who slights it? To insist on such sharing would be 
putting a premium on indolence. 

Furthermore, the less gifted always derive more or less 
benefit from the achievements of the more gifted. Every ad- 
vance in the methods of production benefits in the end all 
consumers of the products (149). The less gifted cannot de- 
mand, either as a matter of justice or of expediency, more 



508 CONCLUSIONS 

than what accrues to them in the natural course of free and 
untrammeled competition. 

"When this course is not subject to interference through 
class privilege, nor through unjustifiable restrictions on in- 
dustrial and commercial freedom, all will be better circum- 
stanced under the individualistic system than under any pos- 
sible form of communism. Under the one system progress is 
fostered and production continually facilitated through the 
incentive given to ambition and achievement by the prospect 
of substantial reward, while under any other system ambition 
would become atrophied, achievement diminished and progress 
brought to a stop. 

369. Anarchism. — It is perhaps superfluous to state that 
by "anarchism" is here to be understood, not the idea of 
lawlessness and terrorism which it usually connotes in the pub- 
lic mind, but that propaganda, often called "philosophic" 
anarchism, which is based on the idea that the source of the 
disorders of the social organism is to be found in the institu- 
tion of government, which, it is asserted, is essentially an in- 
vasion of the natural freedom of the individual. The theory 
assumes that the individual, if free from coercion or control 
by government, would naturally rule his conduct through an 
inborn sense of justice and an instinctive respect for the 
rights of others. 

According to the tenets of anarchism, the community has 
no right to levy taxes, nor to enforce in any way the collection 
of debts. Nor has it any right to impose legal obligations 
or restrictions of any kind. No one should own land unless 
he occupies and uses it. It is supposed that competition, when 
freed from all obstacles, will naturally adjust the price of the 
products of industry to cost. 

Anarchism, like socialism, is proposed as a means for cor- 
recting such injustice as exists in the present social system, 
but it is diametrically opposed to socialism, both in its diag- 
nosis of the disorder and in the remedy prescribed. As 
already stated, the ailments of society are regarded as due to 
the invasive interference of government through law. But 
instead of distinguishing between laws which conserve the 



369] OLD PROBLEMS IN A NEW LIGHT 509 

natural rights of individuals and those which infringe them, 
all are condemned indiscriminately, and the concepts of gov- 
ernment and of invasion are confused. Under this delusion 
it is concluded that the only way to avoid the invasion of 
natural rights is to abolish all government. The avowed aim 
of anarchism is ''equal freedom" for every individual. 

But equality of freedom necessarily imposes a limit on 
freedom by its very qualification. That limit is at the point 
where invasion begins, and this point must in some way be 
determined. Is that determination to be made by each in- 
dividual for himself ? Is each man to define what constitutes 
invasion and to decide how far his rights go without intrud- 
ing on the equal rights" of another ? Even as between the 
most intelligent and conscientious of men, differences of 
opinion and conviction continually arise as to how far their 
respective natural rights extend. Cases are bound to arise in 
which such differences lead to contentions. Where the in- 
dividuals involved fail to reach a mutual understanding, their 
differences must be adjusted by some extraneous agency, and 
to be effective, the decision of this agency must be capable of 
enforcement. The process of the decision and the manner 
of the enforcement become naturally a matter of general 
agreement, in other words, of a social compact. Thus we have 
law and government in the very nature of any conceivable 
system of anarchism. Equal freedom can prevail only by 
virtue of government. 

The necessity of an organized social body is yet otherwise 
implied in the very fundamentals of anarchism. A right of 
ownership in products of labor, which is one of the tenets of 
the anarchistic school, can exist only by virtue of a social com- 
pact, expressed or implied, and which can endure only where 
there is a supreme power ready to protect that right when 
necessary. 

Opposition to government can be justified only so far as it 
is directed against such enactments of law as violate the prin- 
ciples of equity and invade the natural right of the individual. 
Because some laws are inequitable and therefore invasive is 
no reason for overturning all. It is in the ignoring of this 



510 CONCLUSIONS [370, 371 

truth that the proposition of anarchism is fundamentally 
defective. 

370. Land Tenure Under Anarchism. — The proposition 
of anarchism in relation to land is that occupancy and use 
alone shall confer the right of possession, and that land shall 
not be taxed. This principle, however, could be put in prac- 
tice only under conditions which are tantamount, not to 
anarchism, but to its antithesis, namely communism. 

Anarchism proposes to concede the right of ownership in 
products of labor, such as houses. Suppose, now, the owner of 
a house has cause to change his residence and offers his 
vacated house for rent. The house would continue to remain 
his property, and the rent which he obtains under free com- 
petition would naturally include, not only recompense for 
wear and tear, but also the rent of the land due to location. 
This means that the owner of the house would remain virtually 
the owner of the land on which the house is located and that 
he would continue to get the economic rent, even though he 
ceases to occupy that land. 

In any system of land tenure based on occupancy and use, 
as proposed in the anarchistic system, the entire rent of all 
land would accrue to only a portion of the community, as it 
does under the existing system. But since the rent which land 
yields is really produced by the community at large (180), 
the only just disposition of the rent is that to which we have 
already pointed, namely its appropriation by the community 
through taxation. 

371. Theory of Anarchism Regarding Price. — The sup- 
position that under an anarchistic system the price of products 
would be at the point of cost could not be realized if occupancy 
and use of land conveyed an otherwise unconditional right of 
exclusive possession. It is a fully recognized fact that most 
things can be produced at a lower cost in some places than in 
others, and it has already been shown by Eicardo (172-173) 
that the ruling price equals the normal cost of production at 
the margin, that is, where production is carried on under the 
most unfavorable conditions under which it is still being con- 
tinued. Equality of price and cost would therefore obtain 
only in the case of things produced at the margin of pro- 



372] OLD PROBLEMS IN A NEW LIGHT 511 

duction, and the owners of intra-marginal advantages, who 
can produce at a less cost, would continue to reap unearned 
profits. Land tenure based on occupancy and use would there- 
fore effectually defeat the fundamental aim of philosophic 
anarchism, namely the elimination of unearned gains. 

To bring about that ideal condition under which price 
wiU tend to equal cost, not only at the margin of cultivation, 
but under every degree of natural advantage, it is necessary 
that the economic rent become an item of the cost of pro- 
duction (348) ; and unless this item accrues to the community 
at large, it must accrue as an unearned profit to somebody. 
Since our investigation has made it clear (327) that when 
money and capital are deprived of their monopoly power the 
owner of land will be obliged, under the working of purely 
economic forces, to pay this rent to the community in the form 
of tax, it follows that the ideal aim of anarchism can be 
realized, not through the abolition of government, but simply 
through the abolition of the monopoly power of money. 

372. Conclusion. — ^We started out to learn, if possible, 
why it is that coincident with the enormous increase in the 
facilities of production brought about by modern advances 
in science and the arts, there are frequently recurring in- 
tervals of industrial depression, when workers in many fields 
of industry are thrown out of employment and brought to 
suffering for want of the very things of which the production 
has been so greatly facilitated. 

In the course of this investigation we have been brought 
to the conclusion that the recurring economic paroxysms, 
known as financial crises, which are followed by periods of 
industrial depression, are the inevitable outcome of the 
arbitrary limitation of the volume of the currency. We have 
found that every sjrmptom of the disorder, every successive 
feature of the industrial disturbance, is clearly and unmistak- 
ably traceable to that one prime cause. 

But in addition to that we have also found that this same 
cause gives rise to the most grievous of the many forms of 
social and economic injustice that are so loudly crying for 
redress throughout the modem world. It is the extrinsic 



512 CONCLUSIONS [372 

power of money, that power whereby the owner of money is 
enabled to "make money" without doing anything, that power 
whereby the owner of wealth is enabled to acquire more 
wealth without producing anything, that power of money 
which is due to its being the subject of an impersonal monop- 
oly. We have seen how it is that we are actually fostering 
this monopoly without realizing our error, misled by academic 
misconceptions that have been handed down to us from the 
past. We have found what it is that gives reason to the dis- 
content of wage earners throughout the industrial world. But 
we have also learned to understand that, while it is true that 
the wage earner is bereft of a portion of his earnings to the 
benefit of the wealth owner, the ' * capitalist, " it is not because 
of the greed or wickedness of the wealth owner, as is but too 
often preached to the wage earner, but because this injustice 
is inherent in our existing economic system, and more par- 
ticularly because of the constriction of the facilities of ex- 
change. 

It is through the restriction of the freedom of exchange that 
money and capital have obtained that extraordinary power 
through which industry is periodically paralyzed and the pro- 
ducers are shorn of the full benefit of their own exertion. Is 
this process to go on unchecked until it perhaps reaches the 
vitals of the social system ? Or is the body social to be given 
over to be experimented on with the crude and merely tem- 
porizing remedy of trade unionism, or with one or another 
of the numerous schemes of socialism, all under a misunder- 
standing of the real cause of the trouble ? Or shall it be that, 
with that cause clearly recognized, we remedy the trouble by 
some method that is at once rational, simple and safe ? 

But for the prevalence of groundless economic doctrines 
inherited from past generations, and the tenacity with which 
these are adhered to by present-day leaders in economic 
science, this necessary remedy would before now have been 
applied, by removing all arbitrary restrictions on the natural 
expansion of the means of exchange. Every step in this 
direction has been persistently opposed on the ground that 
the unrestricted monetization of credit, even though that 
credit be completely assured, is fraught with danger to society 



372] OLD PROBLEMS IN A NEW LIGHT 513 

and replete with wrong to individuals. As we have shown 
in the foregoing pages, these fears and anticipations are wholly- 
imaginary. It is the existing currency system that is fraught 
with danger to society and injustice to individuals. This 
system must therefore be reformed. Will it be necessary to 
have this reform inaugurated through private initiative, by 
the formation of local and federated institutions for the 
clearance of commercial accounts, so as to overcome the exist- 
ing limitation of the medium of exchange by lessening the 
need for currency, or shall the facilities of exchange be in- 
creased through reform of our currency laws in the direction 
of permitting the volume of the currency to be determined by 
the exigencies of business- instead of through arbitrary legal 
limitation or other obstruction? 

As regards general objections that can possibly be raised 
against a reform of this nature, none appears to be really 
tenable. There is scarcely one among all the numerous other 
remedies proposed for the existing social and economic dis- 
orders that does not, or would not, in one way or another 
result injuriously to some members of the community, or to 
the community at large. The several measures now adopted by 
governments to "curb the predatory power of wealth," like 
graduated taxation, discriminate against the industrious and 
competent members of the community. Trade unions, in their 
effort to increase the recompense of underpaid labor through 
coercive measures directed against both their employers and 
their fellow workers, invade the freedom of all concerned. The 
Single-Tax proposition, if enacted into law, would work injus- 
tice to a large class of the community. On the contrary, the 
reform of the currency on the lines proposed in the preceding 
chapters would not work injustice in any way whatever. No 
one would be deprived of anything belonging to him, and only 
the abnormal power of capital would come to an end. The 
effect on society generally would be to free the workers in every 
field of industry and commerce, employers and wage earners 
alike, from the incubus imposed by the existing money system 
and to bring about an equitable distribution of the products 
of labor, thus putting an end to the discords which make of our 
modem economic world a babel of contention. 



APPENDIX 

COMMENTS ON THE UNITED STATES BANKING AND CURRENCY 
LAW, APPROVED DECEMBER 23, 1913 

While the present work was going through the press, a reform of 
the banking and currency system of the United States along lines 
widely discussed for several years past was enacted into law. As 
regards general principles, the currency to be issued under the new 
system does not differ from the existing national bank currency. 
The changes relate only to certain details. 

In the first place, the machinery through which the currency is 
to be put into circulation is more complicated. The " Federal Reserve 
Board " is a newly created organ of the government through which 
the issue of the new currency is to be supervised and regulated; and 
a system of " Federal reserve banks " constitutes a new agency in the 
process of issuing currency notes, interposed between the government 
and the individual banks. The reserve banks are to be organized as 
stock companies of which the national banks are obligated, and under 
certain conditions state banks, trust companies and even individuals 
are permitted, to become stockholders. With certain exceptions these 
reserve banks can do business only with each other and with the 
member banks. The principal exceptions are that they shall act as 
depositories and fiscal agents of the government and may engage in 
certain foreign banking operations. 

In the second place, the provisions for insuring the redeemability 
of the currency notes are changed. The " Federal reserve notes " are 
government obligations, redeemable by the reserve banks in gold or 
lawful money, and by the United States Treasury in gold to be fur- 
nished by the reserve banks. No specific limit is placed on the amount 
of these notes that may be issued. This currency is to be advanced 
by the Reserve Board to the reserve banks against collateral security 
in the form of commercial paper previously discounted by the member 
banks and rediscounted by the reserve banks. The latter are to pay 
such rate of interest on these advances as may be established by the 
Federal Reserve Board, and are to maintain a gold reserve of 40 per 
cent, of the amount of the issued currency remaining in circulation. 

The Federal reserve banks receive deposits from the member banks 
and also from the government. These deposits are available for the 
rediscounting of the paper presented by the member banks, but a 
reserve of 35 per cent, of the deposits, in gold or lawful money, must 

515 



516 APPENDIX 

be maintained. Each member bank is to maintain a reserve of 12, 15 
or 18 per cent, of its deposits, according to location, this reserve to 
consist in part of currency and in part of deposits in the Federal reserve 
bank of its district. 

The principal feature of this system making for greater freedom 
of exchange is the provision for the use as a basis for currency of a form 
of credit having much greater compass than that provided under the 
previous system. But the possible benefits of this provision are in part, 
if not entirely, neutralized by other features. 

The machinery for distributing the currency is unduly complicated 
by the interposition of the Federal reserve banks between the govern- 
ment and the individual banks. In the previous system the national 
banks were the direct agents between the government as guarantor and 
the people as users of the currency. 

Although the law does not specify a definite limit to the amount 
of the reserve notes, there is nevertheless imposed indirectly a limitation 
that tends to prevent the issue from becoming adequate to the real 
needs of commerce. 

The provision requiring the reserve banks to maintain 40 per cent, 
gold reserve has this effect. It is apparent that under this condition 
the amount of the currency issued cannot exceed two and one-half times 
the amount of gold held as reserve for the issue. And inasmuch as 
the amount of gold available is limited, the amount of notes that can 
be issued is thereby restricted. 

This restriction is partially relieved by the reduction of the 
reserve previously required of national banks, this reduction per- 
mitting a corresponding expansion of bank credit. 

There is, however, another obstruction to the note issue, namely, 
the greater cost of bringing the notes into circulation, as compared 
with that under the old national bank system. This cost embraces 
several items. To begin with, the reserve banks are to pay on the 
reserve notes advanced to them such rate of interest as may be 
established by the Federal Reserve Board. Let us suppose that the 
Board determines it at 2 per cent. To this each reserve bank must 
add something to cover its expenses and an amount calculated to 
aflbrd dividends on the 40 per cent, gold reserve supplied by the stock- 
holders and lying idle in the bank. The stock being expected to return a 
dividend of 6 per cent., the discount rate of the reserve bank must yield 
for the reserve alone 2.4 per cent, of the amount of its note issue. Should 
then the annual cost of conducting the reserve bank, including the current 
assessment for the requirements of the Reserve Board, amount to, say, 1 
per cent., the discount rate of the reserve bank cannot be less than 5.4 per 
cent. And if the member banks must pay this rate for the money, they 
cannot afford to lend it to borrowers at 6 per cent., the legal limit of 
interest in many states of the Union. The demand for Federal reserve 



APPENDIX 517 

notes by member banks would in that case be so low that very little of 
that currency would be called for, unless, indeed, the interest charged 
by the Reserve Board is kept down to practically nil, and the dividends 
of the reserve banks are made up in part from other sources, such as the 
loaning out of the deposits received from the member banks and the 
government. Some additional income is calculated to accrue from 
international transactions, but this cannot be accounted as an important 
factor of the case. 

As regards security, the national bank currency is, if anything, 
better safeguarded than the new currency. The former is doubly 
secured; first, by the borrowers' pledges held by the banks of issue, 
and second, by Federal bonds, the property of the banks. Of these two 
securities the more reliable, consisting of the bonds, is placed in custody 
of the government, which, in turn, guarantees the validity of the 
notes. In the new system the security consists of the borrowers' 
pledges and the assets of the reserve banks, including the required 
gold reserve. Of these the less reliable, the pledges of the borrowers, 
are placed constructively in custody of tlie government. But these 
securities require frequent renewal and recurring scrutiny, involving an 
added complication and a corresponding cost. 

Should it happen that commercial paper, rediscounted by a reserve 
bank for one of its member banks, becomes uncollectible, and the bank 
that had it rediscounted is unable to replace it by valid pledges, being 
itself bankrupt, the deposit of the defaulting bank is applied to cover 
the deficit. And if this deposit should be insufficient, the reserve bank 
must make good the balance. Such loss, accordingly, falls on the 
remaining stockholding banks. In this way the reserve bank becomes 
an insurance agency through which any loss caused to the reserve 
system by a defaulting bank is distributed among all other banks 
of the district. This is the only valid justification for the creation of 
an agency intervening between the government and the individual 
banks. Complete security of the currency is thereby assured, but this 
desideratum is attained in a much more cumbrous manner than under 
the former system. 

In the conflict of opposing views on the general subject of banking 
and currency the law, as finally passed by Congress and approved by 
the President, came to include some provisions which, on close exami- 
nation, would appear to be in conflict with the main purpose of the law. 

In the rediscounting of commercial paper each Federal reserve 
bank is restricted to dealings with its member banks. The profits out 
of which to pay dividends to the member banks as stockholders must 
therefore be made out of them as borrowers. If every stockholding 
bank were to borrow in proportion to the stock it holds, it would be 
immaterial whether the discount rate be so high as to afford normal 
dividends, or so low as to afford none at all. What the member banks 



518 APPENDIX 

would lose on one hand, they would gain on the other. A high rate 
of discount charged and correspondingly high dividends paid by the 
reserve bank would accordingly be of advantage only to those stock- 
holding banks which do but little discounting, while those that dis- 
count more than a proportionate share would be benefited through 
a low rate of discount, even though the rate of dividends would thereby 
by diminished. If the reserve banks are to be enabled to pay divi- 
dends of 6 per cent, on the paid-in capital, as indicated in the law, 
their discount rates must, as observed above, be so high as to deter the 
member banks from having their commercial papers discounted, a con- 
dition which obviously militates against the volume of currency respond- 
ing to the needs of commerce. 

With the view of creating an elastic currency, commercial paper, 
of which there is an abundance, is to be utilized instead of Federal 
bonds as that security for the currency which is to be held by the 
government. But it is the use of this very kind of security which 
introduces an element of incongruity. Currency is an instrument 
with which to make payment for goods delivered or services rendered 
by one to another, while commercial paper is an instrument through 
which such payment is postponed. It follows that under this plan 
the means for making payment are obtainable only through a system 
of postponing payment. A currency system requiring as an essential 
of its existence an indefinite perpetuation of the practice of deferring 
the payment of debts through promises to pay them in the future 
cannot be regarded as a rational solution of the currency problem. 

While the Federal reserve currency system is a step in the right 
direction, inasmuch as it affords the possibility of a much needed 
expansion of the currency without jeopardizing its soundness, the short- 
comings of the system are such as to make the process of issuing the 
currency so costly that the intention of the law, that of rendering 
the business world independent of financial disturbances, can at best 
be but partially realized. Commerce and industry can be benefited 
by the Federal reserve system only in the measure in which it will 
afford the business world a lower rate of interest and discount than 
ruled before. 



LIST OF AUTHORS QUOTED 

Bentham: "Defense of Usury," by Jeremy Bentliam, London, 1790. 

Bilgbam: " Involuntary Idleness," by Hugo Bilgram, Philadelphia, J. B. 
Lippincott Company, 1889. 

Bohm-Bawekk : "Capital and Interest." (Kapital und Kapitalzins, von 
Eugen V. Bohm-Bawerk. I Abteilung: Geschichte und Kritik der 
Kapitalzins Theorien. Innsbruck, 1884.) Translated by William 
Smart, London and New York, 1890. 

" Positive Theory of Capital." ( Kapital und Kapitalzins, von 
Eugen V. Bohm-Bawerk. II Abteilung: Positive Theorie des 
Kapitales. Innsbruck, 1889.) Translated by William Smart, 
London and New York, 1891. 

" The Positive Theory of Capital and its Critics," by E. v. Bohm- 
Bawerk, Quarterly Journal of Economics, January, 1896. 

Conant: "The Principles of Money and Banking," by Charles A. 
Conant. In two volumes. New York and London, Harper Brothers, 
1905. 

George : " Progress and Poverty," by Henry George, New York, John 
W. Lovell & Co., 1883. 

MacLeod : " Elements of Economics," by Henry Dunning MacLeod. In 
two volumes. New York, D. Appleton & Co., 1881. 

Mabx: "Capital." (Das Kapital, von Karl Marx, Hamburg, Otto 
Meissner, 1872.) Translated by Samuel Moore and Edward Aveling, 
Chicago, Charles H. Kerr & Co., 1906. 

Mill: "Principles of Political Economy," by John Stuart Mill. In two 
volumes. New York, D. Appleton & Co., 1884. 

Newcomb : " Principles of Political Economy," by Simon Newcomb, New 
York, Harper Brothers, 1886. 

Perry : " Elements of Political Economy," by Arthur Latham Perry, 
New York, Charles Scribner & Co., 18G6. 

RiCARDO : " The Works of David Ricardo," by J. R. McCulloch, London, 
John Murray, 1886. 

Seager: "Principles of Economics," by Henry Rogers Seager, New 
York, Henry Holt & Co., 1913. 

Smith: "Wealth of Nations," by Adam Smith, London, George Rout- 
ledge & Sons. 

Spencer: " Social Statics," by Herbert Spencer, New York, D. Appleton 
& Co., 1888. 

Walker : " Money," by Francis A. Walker, New York, Henry Holt & Co., 
1883. 

519 



OUTLINE OF INDEX 



14. 
15. 
16. 
17. 

18. 

19. 



Abstinence. See Theories. 

Anarchism. See Theories. 

Arbitration. See Trade Unions. 

Bank Credit. 

Bank Notes. See Currency. 

Banks of Issue. 

Barter. See Distribution of 
Products. 

Business Stagnation. 

Capital. 

Capital Goods. 

Chance. 

Cheeks. See Bank Credit. 

Commerce. See Distribution 
of Products. 

Commercial Clearance. See 
Currency Reform. 

Communism. See Theories. 

Competition. 

Cost of Production. 

Credit. 

Currency. 

Currency Reform. 

Debts and Debtors. 

Definitions. 

Demand. See Supply and De- 
mand. 

Diagrams. 

Diminishing Returns. 

Distribution of Products. 

Distribution of Wealth. 

Dollar. See Unit of Value. 

Economic Forces. 

Effort. See Labor. 

Employment. 



20. Equity. 

Exchange. See Distribution of 
Products. 

21. Gold. 

Groups. See Productive 
Groups. 

Income. See Distribution of 
Wealth. 

Industrial Flow. See Mone- 
tary Flow. 

Inertia. See Economic Forces. 

Inflation. See Currency Re- 
form. 

22. Insurance. 

23. Interest. 

24. Labor and Industry. 

Labor Legislation. See Trade 
Unions. 

25. Land. 

26. Land Values. 

27. Laws. 

Market. See Distribution of 

Products. 
Means of Production. See 

Production. 

28. Monetary Flow. 

29. Money. 

30. Monopoly. 
Ownership. See Rights. 

31. Price and Price Limits. 

32. Production and Consumption. 

33. Productive Groups. 
Profits. 

Redemption. See Currency. 
Rent. 

5£1 



34 



35 



52^ 



OUTLINE OF INDEX 



36. Eights. 

Risk. See Chance. 

Saving. See Economic Forces. 

Seignorage. See Value of 

Money. 
Single Tax. See Theories. 
Socialism. See Theories. 
Speculation. See Chance. 

37. Supply and Demand. 

38. Tariff. 

39. Taxes. 

40. Theories. 



41. Theory. 

42. Trade Unions. 
Unemployment. See Employ- 
ment. 

43. Unit of Value. 

44. Utility. 

45. Value. 

46. Value of Money. 

47. Wages. 

Waste. See Chance. 
Wealth. See Distribution of 
Wealth. 



INDEX 



[nxtmbers rkfer to paragraphs, not to pages.] 



1. Bank Credit, 104, 105 
Bank Checks, 104 
Limitation of Bank Credit, 

104, 238 
Bank Reserves, 104, 292-294, 

303 
Margin of Security of Bank 

Credit, 104, 304 
The Real Issuers of Bank 

Credit, 105 
Deposit Insurance, 220, 263, 

289, 290, 304 

2. Banks of Issue, 101, 302- 

304, 307 
Evolution of Modern Banking, 

103 
" Wild-cat " Banking, 103, 322 

3. Business Stagnation, 1, 121, 

268-284 
Cycle of Industrial Activity, 

271-276 
Current Attempts to Account 

for Stagnation, 277 - 284, 

361-363 

4. Capital, 129-135, 197. See 

also (5) Capital Goods. 
Distinction Between Capital 

and Wealth, 129, 319 
All Forms of Capital Have 

Equal Rates of Income, 

131, 185, 258, 267 
" Fixed " and " Floating " 

Capital, 132 
Active and Idle Capital, 133, 

203, 211, 241, 242 
Capital Viewed as a Fund, 135 



4. Capital — Continued. 
Efficiency of Capital, 155-162 
Relation of Capital to Labor, 

155-162, 191, 243 
Final Efficiency of Capital, 

162, 195, 196, 205, 241, 242 
The Aggregation of Capital, 

211 
Abundance of Real Capital, 266 
Capital Not Productive, 336 

5. Capital Goods, 129-134, 186- 

208, 210, 211 
Classification of Capital Goods, 

132 
Value of Capital Goods, 132, 

133, 152, 153, 197, 198 

6. Chance, 1, 13, 14, 215-224 
Risk, 13, 14, 72, 76, 96, 112, 

139, 219, 263 
Waste Attending Production, 

13, 58, 219 
Gambling and Speculation, 

218, 277-280 
The Law of Chance Profits, 224 

7. Competition, 147-150 
Competition Equalizes Mar- 
ginal Cost and Final Utility, 
148, 150, 221 

The Law of Value Contingent 
on Free Competition, 150, 
243 

Relation of Wages to Profits 
Not Governed by Competi- 
tion, 154 

The Strife of Competition, 342- 
346 

523 



524 



INDEX 



8. Cost of Peoduction, 61 

Cost Determines Sellers' Price 

Limit, 61 
Cost Theory of Value, 62, 63 
Marginal Cost, 62 
Marginal Cost Normally 

Equals Final Utility, 63, 

148, 150, 221 

9. Credit, 66-76 

Three Forms of Credit, 69 
Divergent Conceptions of 

Credit, 70 
The Substance of Credit, 72 
Superposed Credits, 73, 100 
Public Credit, 74, 341 
The Value of Credit, 75, 76 
Depreciated Credit, 76, 96 

10. Currency, 77-125, 285-314. 
See also (11) Currency Re- 
form; (29) Money 

Currency Laws, 85-87, 95, 98, 
99, 256, 260, 302-308 

Issuer of Currency is Debtor, 
92, 210, 259, 260, 263 

The Substance of Currency, 
92, 102, 115, 286-289 

Redemption of Currency, 95, 
101, 292, 295-297, 302, 303 

Depreciated Currency, 96, 112, 
114, 123, 124, 322 

" Inconvertible " Currency, 96 

Subsidiary Coin, 100 

Bank Note Currency, 101, 102 

The Real Issuers of Bank Cur- 
rency, 102 

Restraints on the Issue of 
Currency, 103, 238, 260, 261, 
264 

Currency Laws Examined, 259, 
260 

Natural Limits to the Issue 
of Currency, 291, 292 

The Process of Issuing Cur- 
rency, 299 



10. Currency — Continued 
Money Tokens, 300, 301 

Cost of Issuing Currency, 301 
Missing or Lost Notes, 305 

11. Currency Reform, 285-314 
Volume Theory a Bar to Cur- 
rency Reform, 239, 308, 322 

" Inflation," 239, 320 

Commercial Clearing Institu- 
tions, 309-314 

Results of Currency Reform, 
315, 316 

Unfounded Apprehensions and 
Objections, 317-320 

Effect of Proposed Currency 
Reform on Wages, 350 

12. Debts and Debtors, 66, 68 
Debt the Correlative of Credit, 

66, 68 
Public Debt, 74, 341 
Economic vs. Legal Payment 

of Debt, 75, 95, 341 
Loan Debts Distinguished from 

Business Debts, 245 
Growth of Debts, 246, 255, 270, 

272, 344, 346 
The Volume of Loan Debts, 

251, 271-276, 344-346 

13. Definitions and Explana- 

tions : 
Economics, 4 
Utility, 6, 24 
Immature Products, 6, 132 
Production, 7 
Labor, 8 

Means of Production, 10, 132 
Consumption, 14 
Economic Groups, 15, 16 
Rights, 17, 18 
Laws, 17, 22 

Right of Ownership, 18, 20, 21 
Right and Duty, 19 
Equity, 20 



INDEX 



525 



13. Definitions, etc. — Continued. 

Value and Price, 23-25, 29 

Unit of Value, 28 

Dollar, 28 

Standard Commodity, 29 

Supply and Demand, 34 

Price Limits, 48, 49, 56, 61 

Current Price, 59 

Normal Price, 60 

Cost of Production, 61 

Marginal Eflfort or Cost, 62 

Final Utility, 62 

Margin of Production, 62 • 

Capitalized Values, 65 

Credit and Debt, 66, 68 

Money, 83, 88, 89 

Currency, 88 

" Inconvertible " Currency, 96 

"Fiat" Money, 97 

Seignorage, 97, 113 

Subsidiary Coin, 100 

Issuers' and Agents' Pledges, 
102 

Bank Credit, 104 

Bimetallism, 110 

Monetary and Industrial Flow, 
119 

Capital, 129-132, 135, 197 

Active and Idle Capital, 133 

Wages, 137 

Profits, 137 

Personal and Impersonal Ser- 
vices, 137 

Pent, 138, 139, 186 

Chance Profits, 138, 215 

Amortization, 139 

Capitalist, 143 

Venturer, 144 

Employer, 146 

Competition, 147 

Final Efficiency of Capital, 162 

Land, 170 

Margin of Cultivation, 175 

Cumulative Rent, 176 

Unearned Increment, 181 



13. Definitions, etc. — Continued. 
Actual Rate of Land Tax, 182 
Speculative Land Values, 183 
Present and Future Goods, 197 
Waiting, 200 

Surplus Value, 207 

Insurance, 220 

Economic Inertia and Momen- 
tum, 221-223 

Monopoly, 225, 226 

Impersonal Monopoly, 226, 232 

The Barren Circulation of 
Money, 245, 248, 249 

Loan and Business Debts, 245 

Money in Active and Passive 
State, 247 

Socialism, Communism, Anar- 
chism, 365, 368, 369 

14. Diagrams: 
Fig. 1—39, 40 

Fig. 2—42, 43, 46, 148 

Fig. 3—45 

Fig. 4 — 46 

Fig. 5—48-50, 56 

Fig. 6—56-64, 115, 200 

Fig. 7—59 

Fig. 8—64 

Fig. 9—64, 153 

Fig. 10—64 

Fig. 11—108, 121, 320, 321, 

346 
Fig. 12—149 
Fig. 13—154, 155, 159, 160, 

166-168, 181, 185, 

257, 348 
Fig. 14—157-159, 161, 162, 177 
Fig. 15—160, 161 
Fig. 16—161, 162, 177 
Fig. 17—161 
Fig. 18—161, 195, 243, 244, 

316, 347 
Fig. 19—161 
Fig. 20—173, 180, 185, 267, 

323, 325, 359 



526 



INDEX 



14. Diagrams — Continued. 
Fig. 21—177, 178 
Fig, 22—213, 214, 260 
Fig. 23—221, 232 
Fig. 24—234, 235 

Fig. 25—247-256,267,270-275 
Fig. 26—271-276 

15. Diminishing Returns: 

In the Use of Capital, 10, 156 
In the Use of Land, 175 
In the Intensity of Cultiva- 
tion, 178 
In Discounting the Future, 197 

16. Distribution of Products, 12, 

83, 127, 217 

Advertising, 12 

Work of Distribution Indis- 
pensable, 12, 217 

Buying and Selling are Recip- 
rocal, 34, 51, 52 

Barter, 47-50 

Complex Barter, 52, 83, 295 

17. Distribution of Wealth, 126- 

162, 267. See also (23) In- 
terest; (34) Profits; (35) 

Rent; (47) Wages. 
Classification of Incomes, 136- 

140 
Wages, the Recompense for 

Personal Services, 137 
Profits, the Recompense for 

Impersonal Services, 137 
Apportionment between Labor 

and Capital, 137, 151, 154- 

162, 267, 347, 348 
Classification of Profits, 138- 

140 
Composite Nature of Gross 

Incomes, 139, 140, 154, 248, 

263, 264 
Amortization is Part of Cost 

of Supplies, 139, 143, 157, 

265 



17. Distribution of Wkalth 

Continued. 
The Capitalist's Recompense, 

139, 143, 157, 265 
The Venturer's Income, 144, 

219, 224 
Wages Vary Inversely as In- 
terest, 159 
Gross and Net Proceeds from 

Land, 181, 182 
Division of Gross Proceeds 

from Land, 184 
Monopoly Incomes, 234 
Concentration of Wealth, 338 
Efforts to Curb the Concentra- 

tion of Wealth, 339 

18. Economic Forces: 

Desire, the Impelling Force, 5, 
35-41, 43 

Aversion or Reluctance, the Re- 
straining Force, 35, 41-43 

Evaluation, 48-50, 54 

Competition, 147-150 

Abstinence or Waiting, 195, 
196, 200 

Inducements to Save, 196, 200, 
205, 254, 318 

Inertia and Momentum, 221- 
223 

Economic and Legal Impedi- 
ments, 225 

Monopoly, 225-235 

19. Employment: 

Choice of Occupation, 44, 61, 

149 
The Problem of Unemployment, 

268-270 
Remedy for Unemployment, 

316 

20. Equity, 20 

Equity a Test of Just Laws, 

22, 259, 260, 325 
Ethics of Monopolies, 227 



INDEX 



527 



21. Gold: 

Gold the Adopted Standard of 
Value, 28 

Gold Coin a Credit Instru- 
ment, 93, 94 

Gold Reserve, 103, 292-297 

The Value of Gold, 108, 109, 
320 

The Standard Commodity has 
an Assured Market, 259 

The Demand for Gold, 293, 294 

Reducing the Monetary De- 
mand for Gold, 294 

Exportation of Gold, 320, 351 

22. Insurance, 139, 220 
Insurance Item of Gross In- 
terest, 139, 220, 248, 263 

Deposit Insurance, 220, 263, 
289, 290, 304 

23. Interest, 133, 138, 139, 186- 

214,236-267. See also (17) 
Distribution of Wealth. 

Interest Cannot Accrue to Idle 
Capital, 133, 197 

Capital Interest, 138, 139, 186- 
208, 242, 257, 258, 265 

Money Interest, 138, 139, 188, 
200-204, 209-214, 240 

Composite Nature of Gross In- 
terest, 139, 248, 263, 264 

Capital Interest Compared 
with Rent, 187, 258 

Capital Interest Compared 
with Money Interest, 188 

Calvin's Explanation of In- 
terest, 190, 204, 237 

Interest Theories, 190 - 208, 
236-267 

Interest as an Inducement to 
Save, 196, 205, 254 

Final Utility of Waiting, 200 

Money Interest is Paid for the 
Use of Money, 210, 211, 240, 
242 



23. Interest — Continued. 
Inefficacy of Usury Laws, 236 
Capital Returns Accrue in the 

Form of Idle Capital, 244 
The Rate of Interest, 252-256 
Interest is a Monopoly Tax, 

261 
Interest a Toll on the Right to 

Work, 261, 291, 347 

24. Labor and Industry, 8, 9 
Efficiency of Labor, 10, 11, 

155-161 
Specialization of Labor, 11 
Co-operation, 11 

25. Land, 130, 170-185 

Land Distinguished from Im- 
provements Thereon, 171 

Net Proceeds from Land, 181, 
184 

The Land Question, 323-334 

26. Land Values, 181-185 

The Unearned Increment, 181- 

184 
The Law of Land Values, 182, 

183 
Speculative Land Values, 183 
Land Values, Tantamount to a 

Public Debt, 326, 329 
Assessment of Land Values, 

330, 331 

27. Laws: 

(A) Economic Laws, 17 

The Law of Equal Freedom, 22 

The Law of Value, 30, 55, 58, 
64, 150 

The Law of Supply and De- 
mand, 58, 150 

The Law of Competition, 147- 
150 

The Law of Wages, 166, 347- 
350 

Ricardo's Law of Rent, 172- 
174 



528 



INDEX 



27. Laws — Continued. 

The Law of Land Values, 182, 

183 
The Law of Chance Profits, 224 
The Law of Interest, 244-256 

(B) Statutory Laws, 17, 22 
Exclusive Rights Due to Law, 

18 
Currency Laws, 85-87, 95, 98, 

99, 259, 260, 302-308 
Legal-tender Laws, 86, 95, 96, 

98, 99, 306 
Inefficacy of Usury Laws, 236 
Corporation and Bankruptcy 

Laws, 340 
Protective Tariff, 351-353 
Labor Legislation, 355 

28. Monetary and Industeial 

Flow, 119-121, 270 
Rapidity of Circulation, 119, 

120, 291 
Impediments to Industrial 

Flow, 121, 241, 270 
Flow of Products in Course of 

Production, 153, 241 
The Barren Flow of Money, 

245-249 

29. Money, 77-125, 285-314. See 

also (10) Currency; (46) 

Value of ;Money 
Complex or Indirect Barter, 

52, 83, 259 
Money not a Value Denomi- 
nator, 78, 79, 115, 122, 123 
" Money," " Dollar," and 

"Gold" often Confused, 78, 

79, 88, 95, 115 
Gold the International Money, 

79 
The Function of Money, 83, 88, 

211, 241 



29. Money — Continued. 

The Essence of Money, 84, 85, 
298 

The Right Conveyed by Money, 
87 

Theory of Money, 89-92 

Money Tokens are Credit In- 
struments, 89, 93, 202, 210, 
300 

Owner of Money is Lender of 
Goods, 89-92, 209-211, 259 

Credits and Debits of the 
Money System, 91, 92 

The Issuer of Money is Debtor, 

92, 210, 259, 260, 263 

The Substance of Money, 92, 

102, 115, 286-289 
Standard or " Basic " Money, 

93, 94, 293 

Acceptance of Coin is not a 
Purchase of Gold, 93, 259 

"Fiat" Money, 97, 322 

Subordinate Money Systems, 
106 

Money not a Specific Com- 
modity, 115, 123, 240 

Money vs. Capital Goods, 131, 
132, 134, 138, 188, 202, 203, 
210, 211 

Money Never "Present" 
Goods, 202 

Money Never a Means of Pro- 
duction, 203, 209 

Efficiency of Money, 212-214, 
238, 242 

Money in Active and Passive 
State, 247 

The Twofold Capacity of 
Money, 267 

Over-supply of Goods Due to 
Under-supply of Money, 269, 
270 

Apparent Plethora of Money, 
274 



INDEX 



529 



30. Monopoly, 18, 225-235 
Monopoly Implies Restraint, 

18, 226 
Franchises, 65, 231, 334 
Impersonal Monopoly, 226, 232 
Ethics of Monopolies, 227 
Monopoly Incomes, 234, 235 
The Power of Monopoly, 235 
Power of the Money Monopoly, 

262, 345 

31. Peice and Price Limits, 29, 

48, 49, 56 

Price Determination, 55-61 

Buyers' Price Limit is Measure 
of Utility, 56 

Sellers' Price Limit is Meas- 
ure of Effort, 56, 61 

Price Fluctuations, 58, 60, 108, 
221, 278, 346 

Current vs. Normal Price, 59, 
60 

Factors Accounting for Vari- 
able Sellers' Price Limit, 61 

32. Peoduction and Consumption, 

5-14 
Means of Production, 10, 14, 

132, 152, 153, 197 
Specialized Production, 11, 126 
Waste Attending Production, 

13, 58, 219 
Margin of Production, 62, 175 

33. Peodtjctive Geoups, 15, 16, 

127, 141 
Functions Personified, 15, 16, 

141-146 
Active and Passive Agents, 142, 

143 
Manager and Workmen, 142 
Capitalist, 143 
Venturer, 144 
Composite Agents, 145 
Employer, 146 



34. Profits, 137-140. See also 

(17) Distribution of 

Wealth 
Chance Profits, 138, 144, 215- 

224 
Composite Nature of Business 

Profits, 140 

35. Rent, 138, 139, 170-185, 348 
Composite Nature of Gross 

Rent, 139 
Rent Accrues to Landovsmer, 

139, 171, 324 
Ricardo's Law of Rent, 172- 

174 
Margin of Cultivation, 175 
Cumulative Rent, 176 
Intensity of Cultivation, 177 
Personal Factor in Rent, 179 
The Source of Rent, 180, 323 
Absorption of Rent by Taxa- 
tion, 325-329, 348 

36. Rights, 17 

Exclusive Rights Due to Law, 

18 
The Right of Ownership, 18, 

20, 21, 67-69, 71, 228 
Right and Duty, 19 

The Right of Land Ownership, 

21, 170, 230, 324-330, 360, 
370 

The Right Conveyed by Money, 
87 

37. Supply and Demand, 34-43, 

56-58 

Total Supply Equals Total De- 
mand, 34, 269, 270 

Equilibration of Supply and 
Demand, 43, 56, 58, 63 

Relation of Supply and De- 
mand to Price, 57, 153 

The Law of Supply and De- 
mand, 58, 150 



530 



INDEX 



37. SiTPPLY AND Demand — Contd. 
Demand for Money Exceeds 

Demand for Merchandise, 
201, 270 
Apparent Excess of Supply 
over Demand, 269-270 

38. Tariff, 284, 351-353 

Tariff Theory in Conflict with 

Volume Theory, 351 
Balance of Trade Co-related to 

Eate of Interest, 352 
Advantages of a Tariff, 353 

39. Taxes, 19 

Taxes on Issue of Currency, 

103, 238, 303 
Tax on Land, 181-184, 325-333, 

359 
Graduated Taxation, 339 

40. Theories: 

Cause of Business Stagnation, 

1, 121, 268-284 
Theory of Value, 33-65, 153 
Theory of Money, 89-92 
Seignorage Theory of the Value 

of Money, 113, 114 
Volume Theory of the Value of 

Money, 115-125, 239, 320, 

322 
Commodity Theory of the 

Value of Money, 115-125, 

239 
Wage Theories, 163, 164, 166- 

169, 347-350 
Interest Theories, 190 - 208, 

236-267 
The Productivity Theory of 

Interest, 191-194, 243 
The Abstinence Theory of In- 
terest, 195, 196 
The "Positive Theory of 

Capital," 197-206 



40. Theories — Continued. 

The " Surplus Value " Theory 
of Interest, 207, 208 

The Monopoly Theory of In- 
terest, 230-267 

Current Theories of Business 
Stagnation, 277-284, 361- 
363 

Single Tax, 359-364 

Socialism, 164, 207, 208, 365- 
368 

Communism, 368 

Anarchism, 369-371 

41. Theory, 1-3 

Departure from Averages, 1, 
43, 58, 215-224 

Induction and Deduction, 3 

Multiple Function of Individ- 
uals, 16, 56, 247, 249 

Advantages of Graphical 
Methods of Study, 46 

42. Trade Unions, 354-358 
Labor Legislation, 355 
Arbitration in Labor Disputes, 

356 
Strikes and Boycotts, 357 
What Trade Unions Accom- 
plish, 358 

43. Unit of Value, 28-32, 53, 54. 

See also (21) Gold 

Dollar, the Value Unit of the 
United States, 28 

Labor Cannot Serve as a Value 
Unit, 30, 164 

Idealistic and Composite 
Units, 31, 32, 111, 119, 321 

Evaluation of the Current 
Unit, 54 

Money not a Value Denomi- 
nator, 78, 79, 115, 122, 123 

Bimetallism, 110 

Depreciated Value Unit, 112 



INDEX 



531 



44. Utilitt, 6, 7, 9, 24 
Potential Utility, 10, 14, 132, 

153, 197 
Utility in a Product is Lim- 
ited, 14, 139 
Utility Theory of Value, 62, G3 
Final or Marginal Utility, 62, 
63, 221 

45. Value, 23-65. See also (26) 

Land Values; (43) Unit of 

Value; (46) Value of 

Money 
Exchange the Criterion of 

Value, 23, 25-27 
Value Distinct from Utility, 24 
Dual Meaning of the Term 

"Value," 24, 25 
Market Value is Estimated 

Value, 26 
How Values are Measured, 27 
Law of Value, 30, 55, 58, 64, 

150 
Theory of Value, 38-65, 153 
Exchange Rate in Barter, 47- 

50 
Capitalized Values, 65 
Value of Products Independent 

of Interest Rate, 65 
Value of Franchises Depend- 
ent on Interest Rate, 65 
Value Cannot be Created by 

Law, 70, 125, 334 
The Value of Credit, 75, 76 
The Value of Gold, 108, 109, 320 
The Value of Capital Goods, 

132, 133, 152, 153, 197, 198 
The Value of Lending, 200 
" Surplus Value," 207, 208 
Exchange Cannot Enhance 

Values, 216 



46. Value of Money, 94, 96, 98, 

100, 107-125, 239, 240 
The Value of Standard Money, 

94, 98, 114 

The Value of Credit Money, 

95, 96, 101 

Value of Money not Due to 

Demand for Money, 97, 115, 

123 
Value of Money Measured by 

Conventional Unit, 107 
Seignorage Theory of the 

Value of Money, 113, 114 
Volume Theory of the Value 

of Money, 115-125, 239, 320, 

322 
Commodity Theory of the 

Value of Money, 115-125, 

239 
Gresham's Law, 123 
Value of Money not Altered 

Between Exchanges, 134 

47. Wages, 137, 163-169. (See 

also (17) Distribution of 

Wealth 
The . Sharing of Wages, 149, 

165-169 
Wage Theories, 163, 164, 166- 

169, 347-350 
Three Forms of Wages, 165 
The Law of Wages, 166, 347- 

350 
Employers' Wages, 167, 168, 

205, 217 
Competition Tends to Dis- 
tribute Wages Equitably, 

169 
Wages a Residual Share, 267 
Effect of Proposed Currency 

Reform on Wages, 350 



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